avis budget group ABCR_1Q07_Financials

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Avis Budget Car Rental, LLC Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition And Results of Operations for the Three Months Ended March 31, 2007

Transcript of avis budget group ABCR_1Q07_Financials

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Avis Budget Car Rental, LLC Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition And Results of Operations for the Three Months Ended March 31, 2007

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TABLE OF CONTENTS

Page Forward-looking Statements 1 Financial Statements: Consolidated Condensed Statements of Income for the Three Months Ended March 31, 2007 and 2006 3 Consolidated Condensed Balance Sheets as of March 31, 2007 and December 31, 2006 4 Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 5 Consolidated Condensed Statement of Stockholder’s Equity for the Three Months Ended March 31, 2007 7 Notes to Consolidated Condensed Financial Statements 8 Management’s Discussion and Analysis of Financial Condition and Results of Operations 19 Exhibit Index 25

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FORWARD-LOOKING STATEMENTS

The forward-looking statements contained herein are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on various facts and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “believes”, “expects”, “anticipates”, “intends”, “projects”, “estimates”, “plans”, “may increase”, “may fluctuate” and similar expressions or future or conditional verbs such as “will”, “should”, “would”, “may” and “could” are generally forward-looking in nature and not historical facts. You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

• the high level of competition in the vehicle rental industry and the impact such competition may have on pricing and rental volume;

• an increase in the cost of new vehicles;

• a decrease in our ability to acquire or dispose of cars generally through repurchase or guaranteed depreciation

programs and/or dispose of vehicles through sales of vehicles in the used car market; • a decline in the results of operations or financial condition of the manufacturers of our cars;

• a downturn in airline passenger traffic in the United States or in the other international locations in which we

operate; • an occurrence or threat of terrorism, pandemic disease, natural disasters or military conflict in the markets in

which we operate; • our dependence on third-party distribution channels;

• a disruption or decline in rental activity, particularly during our peak season or in key market segments;

• a disruption in our ability to obtain financing for our operations, including the funding of our vehicle fleet via

the asset-backed securities and lending market; • a significant increase in interest rates or in borrowing costs;

• our failure to increase or decrease appropriately the size of our fleet due to the seasonal nature of our business;

• our ability to accurately estimate our future results;

• our ability to implement our strategy for growth;

• a major disruption in our communication or centralized information networks;

• our failure or inability to comply with regulations or any changes in regulations;

• our failure or inability to make the changes necessary to operate effectively now that we operate independently

from the former real estate, hospitality and travel distribution businesses following the separation of those businesses from our parent company during third quarter 2006;

• other business, economic, competitive, governmental, regulatory, political or technological factors affecting

our operations, pricing or services;

• risks inherent in the restructuring of the operations of Budget Truck Rental;

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• risks inherent in the separation and related transactions, including risks related to our new borrowings, and costs of the separation; and

• the terms of agreements among the separated companies, including the allocations of assets and liabilities,

including contingent liabilities and guarantees, commercial arrangements and the performance of each of the separated companies’ obligations under these agreements;

Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law.

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Avis Budget Car Rental, LLC CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Unaudited (In millions)

Three Months Ended

March 31, 2007 2006 Revenues Vehicle rental $ 1,077 $ 1,065 Other 281 254 Net revenues 1,358 1,319 Expenses Operating, net 711 699 Vehicle depreciation and lease charges, net 362 330 Selling, general and administrative 148 158 Vehicle interest, net 71 91 Non-vehicle related depreciation and amortization 23 18 Interest expense related to corporate debt, net 34 (14) Separation costs 2 - Total expenses 1,351 1,282 Income before income taxes 7 37 Provision for income taxes 3 14 Net income $ 4 $ 23

See Notes to Consolidated Condensed Financial Statements.

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Avis Budget Car Rental, LLC CONSOLIDATED CONDENSED BALANCE SHEETS

Unaudited (In millions)

March 31, December 31, 2007 2006 Assets Current assets: Cash and cash equivalents $ 201 $ 130 Receivables, net 419 367 Other current assets 190 181 Due from Avis Budget Group, Inc. and affiliates, net 33 - Total current assets 843 678

Property and equipment, net 481 486 Deferred income taxes 86 173 Goodwill 2,193 2,193 Other intangibles, net 738 738 Other non-current assets 69 61 Total assets exclusive of assets under vehicle programs 4,410 4,329

Assets under vehicle programs: Program cash 19 14 Vehicles, net 8,143 7,049 Receivables from vehicle manufacturers and other 178 276 Investment in Avis Budget Rental Car Funding (AESOP) LLC – related party 347 361 8,687 7,700 Total assets $ 13,097 $ 12,029

Liabilities and stockholder’s equity Current liabilities: Accounts payable and other current liabilities $ 732 $ 655 Current portion of long-term debt 25 25 Deferred income taxes 2 2 Due to Avis Budget Group, Inc. and affiliates, net - 154 Total current liabilities 759 836

Long-term debt 1,794 1,813 Income tax payable 9 - Other non-current liabilities 395 390 Total liabilities exclusive of liabilities under vehicle programs 2,957 3,039

Liabilities under vehicle programs: Debt 844 759 Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party 5,554 4,511 Deferred income taxes 1,255 1,206 Other 178 203 7,831 6,679 Commitments and contingencies (Note 11)

Stockholder’s equity: Common stock, $.01 par value—authorized 1,000 shares; issued and outstanding 100 shares - - Additional paid-in capital 1,170 1,170 Retained earnings 1,071 1,071 Accumulated other comprehensive income 68 70 Total stockholder’s equity 2,309 2,311

Total liabilities and stockholder’s equity $ 13,097 $ 12,029

See Notes to Consolidated Condensed Financial Statements.

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Avis Budget Car Rental, LLC CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Unaudited (In millions)

Three Months Ended

March 31, 2007 2006 Operating Activities Net income $ 4 $ 23 Adjustments to reconcile income to net cash provided by operating activities exclusive of vehicle programs: Non-vehicle related depreciation and amortization 23 18 Deferred income taxes (5) 7 Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: Receivables 1 6 Accounts payable and other current liabilities 32 (78) Other, net (26) (17)

Net cash provided by (used in) operating activities exclusive of vehicle programs 29 (41) Vehicle programs: Vehicle depreciation 352 317 Net cash provided by operating activities 381 276 Investing activities Property and equipment additions (20) (13) Net assets acquired (net of cash acquired) and acquisition-related payments - (13) Proceeds received on asset sales 4 4 Other, net (4) 1 Net cash used in investing activities exclusive of vehicle programs (20) (21) Vehicle programs: Increase in program cash (5) (15) Investment in vehicles (3,476) (3,932) Payments received on investment in vehicles 2,067 3,091 Other, net - (7) (1,414) (863) Net cash used in investing activities (1,434) (884)

Financing activities Principal payments on borrowings (19) - Decrease in due from Avis Budget Group, Inc. and affiliates, net 18 43 Net cash provided by financing activities exclusive of vehicle programs (1) 43 Vehicle programs: Proceeds from borrowings 3,368 3,562 Principal payments on long term borrowings (2,297) (3,026) Net change in short term borrowings 54 43 Other, net - (5) 1,125 574 Net cash provided by financing activities 1,124 617

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Avis Budget Car Rental, LLC CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)

Unaudited (In millions)

Three Months Ended March 31, 2007 2006 Effect of changes in exchange rates on cash and cash equivalents - (1)

Net increase in cash and cash equivalents 71 8 Cash and cash equivalents, beginning of period 130 58

Cash and cash equivalents, end of period $ 201 $ 66

See Notes to Consolidated Condensed Financial Statements.

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Avis Budget Car Rental, LLC CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER’S EQUITY

Unaudited (In millions)

Accumulated Additional Other Paid-in Retained Comprehensive Capital Earnings Income Total Balance at December 31, 2006 $ 1,170 $ 1,071 $ 70 $ 2,311 Cumulative effect of the adoption of FIN 48 - (4) - (4) Balance at January 1, 2007 1,170 1,067 70 2,307 Comprehensive income: Net income - 4 - Currency translation adjustment - - 9 Unrealized gains on cash flow hedges, net of tax of $(7) - - (11) Total comprehensive income 2

Balance at March 31, 2007 $ 1,170 $ 1,071 $ 68 $ 2,309

See Notes to Consolidated Condensed Financial Statements.

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Avis Budget Car Rental, LLC NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts are in millions) Unaudited

1. Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation. Avis Budget Car Rental, LLC (the “Company”), a wholly-owned subsidiary of Avis Budget Group, Inc. (formerly Cendant Corporation) (“ABGI”), provides car and truck rentals and ancillary services to businesses and consumers in the United States and internationally. The Company operates in the following business segments:

• Domestic Car Rental—provides car rentals and ancillary products and services in the United States.

• International Car Rental—provides car rentals and ancillary products and services primarily in Canada,

Argentina, Australia, New Zealand, Puerto Rico, and the U.S. Virgin Islands.

• Truck Rental—provides truck rentals and related services to consumers and light commercial users in the United States.

The accompanying Consolidated Financial Statements include the accounts and transactions of Avis Rent A Car System, LLC (“Avis”) and Budget Rent A Car System, Inc. (“Budget”), both of which are wholly-owned subsidiaries of the Company. In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Condensed Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. The accompanying unaudited Consolidated Condensed Financial Statements of the Company have been prepared in accordance with Accounting Principles Board Opinion No. 28 “Interim Financial Reporting” and the rules and regulations of the Securities Exchange Commission applicable to interim financial reporting. As the accompanying interim financial statements present summarized financial information, they should be read in conjunction with the Company’s 2006 Consolidated Financial Statements. Prior to 2007, certain corporate and general and administrative expenses (including those related to executive management, tax, insurance, accounting, legal and treasury services, purchasing, facilities, human resources, certain employee benefits, information technology, telecommunications, call centers, marketing and real estate usage) have been .allocated by ABGI to the Company based on forecasted revenues, headcount or actual utilization of the services, as applicable. Beginning January 2007, the Company discontinued the general corporate overhead expense allocation from ABGI. Instead the Company allocates to ABGI a percentage of the Company’s general and administrative overhead expenses that are related to publicly-traded company functions. Management believes such allocations are reasonable. However, the associated expenses recorded by the Company in the accompanying Consolidated Statements of Income may not be indicative of the actual expenses that might have been incurred had the Company performed these functions using internal resources or purchased services. Refer to Note 12—Related Party Transactions, for a detailed description of the Company’s transactions with ABGI. Vehicle Programs. The Company presents separately the financial data of its vehicle programs. These programs are distinct from the Company’s other activities since the assets are generally funded through the issuance of debt that is collateralized by such assets. Assets under vehicle programs are funded through borrowings under asset-backed funding or other similar arrangements. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of the Company’s vehicle programs. The Company believes it is appropriate to segregate the financial data of its vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets.

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Acquisitions. Assets acquired and liabilities assumed in business combinations were recorded on the Company’s Consolidated Condensed Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Company’s Consolidated Condensed Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values will be recorded by the Company as further adjustments to the purchase price allocations.

Separation. During first quarter 2007, the Company incurred separation related charges of $2 million in connection with this plan, consisting primarily of employee stock-based compensation charges and other employee costs. In connection with the separation plan, during April 2006, the Company issued $1.0 billion of fixed and floating rate senior unsecured notes and borrowed $875 million under a new $2.4 billion secured facility consisting of a $1.5 billion revolving credit facility with a five-year maturity and a term loan of $875 million with a six-year maturity (see Note 7 – Long-term Debt and Borrowing Arrangements for further information).

Changes in Accounting Policies during 2007

Accounting for Uncertainty in Income Taxes. In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, which is an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company adopted the provisions of FIN 48 effective January 1, 2007, as required, and recorded an after tax charge to stockholder’s equity of $4 million, which represents the recognition of $3 million of accrued interest and an increase of $1 million in the liability for unrecognized tax benefits. Including the impact of the adoption of FIN 48 discussed above, the Company’s unrecognized tax benefits totaled $9 million as of January 1, 2007, $5 million of which would affect the annual effective income tax rate, if recognized. In connection with ABGI’s adoption of FIN 48, the Company reduced alternative minimum tax credit and net operating loss carryforwards in the amount of $94 million and $60 million, respectively. ABGI and the Internal Revenue Service (“IRS”) have settled the IRS examination for the federal consolidated income tax group’s taxable years 1998 through 2002. The IRS has begun to examine ABGI and the Company’s taxable years 2003 through 2006. In addition, the IRS has begun to examine Avis Group Holdings, LLC and its consolidated subsidiaries for the taxable years 1998 through 2002. During the three months ended March 31, 2007, the Company’s unrecognized tax benefits did not significantly change. As of March 31, 2007, the unrecognized tax benefits in the long-term income taxes payable were $9 million. The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations within twelve months. Including the impact of the adoption of FIN 48 discussed above, the Company’s accrual for the payment of potential interest associated with uncertain tax positions was $3 million as of January 1, 2007. During the three months ended March 31, 2007, the Company recorded minimal additional liabilities for the payment of interest. The Company recognizes potential interest related to unrecognized tax benefits within interest expense related to corporate debt, net on the accompanying Consolidated Condensed Statement of Income. Penalties, if incurred, would be recognized as a component of income taxes. Changes in Accounting Policies during 2006 During 2006, the Company revised how it records the utilization of its net operating loss carryforwards by other entities within the ownership structure of the Company’s parent, ABGI. The Company determined it would be preferable to record the utilization of its net operating loss carryforwards as a transfer of assets among related parties reflected in the Company’s intercompany balance with ABGI. Previously, the Company reflected such utilization as a charge to its deferred income tax provision with a corresponding benefit recorded within its current income tax provision.

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The adoption of this change in accounting policy resulted in an approximately $33 million decrease to the Company’s deferred income tax provision with a corresponding increase to the Company’s current income tax provision for the three months ended March 31, 2006. Such adoption did not affect the Company’s reported earnings or financial position. The following schedule presents the effect by financial statement line item of this change on prior years: As Originally Change in As Reported Policy Adjusted Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2006 Deferred income tax $ 40 $ (33) $ 7 Income taxes due from ABGI (31) 31 - Decrease (increase) in due from Avis Budget Group, Inc. and affiliates, net 41 2 43 Recently Issued Accounting Pronouncements In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”). SFAS No. 159 permits a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The Company will adopt SFAS No. 159 on January 1, 2008, as required, and is currently evaluating the impact of such adoption on its financial statements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 157 on January 1, 2008, as required, and is currently evaluating the impact of such adoption on its financial statements.

2. Intangible Assets

As of March 31, 2007 and December 31, 2006, intangible assets consisted of:

Gross Net Carrying Accumulated Carrying

Amount Amortization Amount Amortized Intangible Assets Franchise agreements (a) $ 75 $ 16 $ 59 Customer lists (b) 19 6 13 $ 94 $ 22 $ 72 Unamortized Intangible Assets Goodwill $ 2,193 Trademarks (c) $ 666 ____________ (a) Primarily amortized over a period ranging from 2 to 40 years. (b) Primarily amortized over 20 years. (c) Comprised of various tradenames (including the Avis and Budget tradenames) that the Company has acquired and which

distinguish the Company’s consumer services. These tradenames are expected to generate future cash flows for an indefinite period of time.

Amortization expense relating to all intangible assets was less than $1 million during both first quarter 2007 and 2006. Based on the Company’s amortizable intangible assets at March 31, 2007, the Company expects amortization expense of approximately $2 million for the remainder of 2007 and $3 million for each of the five succeeding fiscal years therafter. As of March 31, 2007 and December 31, 2006, the carrying amount of goodwill consisted of:

Domestic Car Rental $ 1,355 International Car Rental 595 Truck Rental 243 Total Company $ 2,193

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3. Restructuring Charges During fourth quarter 2006, the Company committed to various strategic initiatives targeted principally at reducing costs, enhancing organizational efficiency and consolidating and rationalizing existing processes and facilities within its Budget Truck Rental and Domestic Car Rental operations. The more significant areas of cost reduction include the closure of the Budget Truck Rental headquarters and other facilities and reductions in staff. In connection with these initiatives, the Company recorded a restructuring charge of $8 million in 2006, substantially all of which is anticipated to be paid in cash. The initial recognition of the restructuring charge and the corresponding utilization from inception are summarized by category as follows: Personnel Facility Related (a) Related (b) Total Initial charge $ 4 $ 4 $ 8 Cash payments - (1) (1) Balance at December 31, 2006 4 3 7 Cash payments (2) - (2) Balance at March 31, 2007 $ 2 $ 3 $ 5 ____________ (a) The initial charge primarily represents severance benefits resulting from reductions in staff. The Company formally

communicated the termination of employment to approximately 180 employees, representing a wide range of employee groups. As of March 31, 2007, the Company had terminated approximately 160 of these employees.

(b) The initial charge principally represents costs incurred in connection with facility closures and lease obligations resulting from the closure of the Truck Rental headquarters, consolidation of Truck Rental operations and the closure of other facilities within the Company’s Domestic Car Rental operations.

4. Vehicle Rental Activities

The components of the Company’s vehicles, net within assets under vehicle programs are as follows: As of As of March 31, December 31, 2007 2006 Rental vehicles $ 9,023 $ 7,738 Vehicles held for sale 158 304 9,181 8,042 Less: Accumulated depreciation (1,038) (993) $ 8,143 $ 7,049 The components of vehicle depreciation and lease charges, net are summarized below: Three Months Ended March 31, 2007 2006 Depreciation expense $ 352 $ 317 Lease charges 14 16 Gain on sales of vehicles, net (4) (3) $ 362 $ 330 During the three months ended March 31, 2007, vehicle interest, net on the accompanying Consolidated Condensed Statements of Income excludes $35 million of interest expense related to the fixed and floating rate borrowings of the Company. Such interest is recorded within interest expense related to corporate debt, net on the accompanying Consolidated Condensed Statements of Income.

5. Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2007 is 42.9%. Such rate differs from the Federal statutory rate of 35.0% primarily due to state and local income taxes. In addition, the Company established a valuation allowance related to state deferred tax assets.

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6. Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consisted of:

As of As of March 31, December 31, 2007 2006 Accounts payable $ 203 $ 208 Accrued payroll and related 127 86 Public liability and property damage insurance liabilities (a) 116 116 Other 286 245 $ 732 $ 655

____________ (a) The non-current liability related to public liability and property damage insurance was $263 million and $260 million at March

31, 2007 and December 31, 2006, respectively. 7. Long-term Debt and Borrowing Arrangements

Long-term debt consisted of: As of As of Date 2007 2006

Floating rate term loan April 2012 $ 819 $ 838 Floating rate notes May 2014 250 250 7⅝% notes May 2014 375 375 7¾% notes May 2016 375 375

Total long-term debt 1,819 1,838 Less: Current portion 25 25 Long-term debt $ 1,794 $ 1,813 At March 31, 2007, the committed credit facilities available to the Company were as follows: Total Outstanding Letters of Available Capacity Borrowings Credit Issued Capacity $1.5 billion revolving credit facility (a) $ 1,500 $ - $ 343 $ 1,157 ____________ (a) This secured revolving credit facility was entered into by the Company in April 2006, has a five year term and currently bears

interest at one month LIBOR plus 125 basis points.

The Company’s debt agreements contain restrictive covenants, including restrictions on dividends, the incurrence of indebtedness by the Company and certain of its subsidiaries, mergers, liquidations, and sale and leaseback transactions. The credit facility also requires the maintenance of certain financial ratios. As of March 31, 2007, the Company is not aware of any instances of non-compliance with such financial or restrictive covenants.

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8. Debt Under Vehicle Programs and Borrowing Arrangements

Debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding (AESOP), LLC (“Avis Budget Rental Car Funding”)) consisted of: As of As of March 31, December 31, 2007 2006 Debt due to Avis Budget Rental Car Funding (a) $ 5,554 $ 4,511 Budget Truck Financing:

Budget Truck Funding program 154 135 Capital leases 244 257

Other (b) 446 367 $ 6,398 $ 5,270 __________ (a) The change in the balance at March 31, 2007 principally reflects increased borrowings under the Company’s extendible

commercial paper program and conduit facility during first quarter 2007 to support the acquisition of rental vehicles within the Company’s domestic car rental operations.

(b) The change in the balance at March 31, 2007 primarily reflects incremental borrowings under the Company’s bank loan and commercial paper conduit facilities to support the acquisition of vehicles in its international operations.

Avis Budget Rental Car Funding. Avis Budget Rental Car Funding, an unconsolidated bankruptcy remote qualifying special purpose limited liability company, issues private placement notes that are typically “AAA” rated, and has its principal and interest payments guaranteed by independent insurance companies. Avis Budget Rental Car Funding then uses the proceeds from such issuances to make loans to a wholly-owned subsidiary of the Company, AESOP Leasing LP (“AESOP Leasing”) on a continuing basis. By issuing debt through the AESOP program, Avis Budget pays a lower rate of interest than if the Company had issued debt directly to third parties. AESOP Leasing is then required to use these proceeds to acquire or finance the acquisition of vehicles used in the Company’s rental car operations. As a result, AESOP Leasing’s obligation to Avis Budget Rental Car Funding is reflected as related party debt on the Company’s Consolidated Condensed Balance Sheet as of March 31, 2007 and December 31, 2006. The Company also recorded an asset within assets under vehicle programs on its Consolidated Condensed Balance Sheets at March 31, 2007 and December 31, 2006, which represented the equity issued to the Company by Avis Budget Rental Car Funding. The vehicles purchased by AESOP Leasing remain on the Company’s Consolidated Condensed Balance Sheet as AESOP Leasing is consolidated by the Company. Such vehicles and related assets, which approximate $7.5 billion, (the majority of which are subject to manufacturer repurchase and guaranteed depreciation agreements) collateralize the debt issued by Avis Budget Rental Car Funding, and are not available to pay the obligations of the Company. The business activities of Avis Budget Rental Car Funding are limited primarily to issuing indebtedness and using the proceeds thereof to make loans to AESOP Leasing for the purpose of acquiring or financing the acquisition of vehicles to be leased to the Company’s rental car subsidiary and pledging its assets to secure the indebtedness. Because Avis Budget Rental Car Funding is not consolidated by the Company, its results of operations and cash flows are not reflected with the Company’s Consolidated Condensed Financial Statements. Borrowings under the Avis Budget Rental Car Funding program primarily represent floating rate term notes with a weighted average interest rate of 5% as of both March 31, 2007 and December 31, 2006. Truck financing. Budget Truck financing consists of debt outstanding under the Budget Truck Funding program and capital leases. The Budget Truck Funding program constitues debt facilities established by the Company to finance the acquisition of the Budget truck rental fleet. The borrowings under the Budget Truck Funding program are collateralized by $164 million of corresponding assets and are floating rate term loans with a weighted average interest rate of 5% as of March 31, 2007 and December 31, 2006. The Company has also obtained a portion of its truck rental fleet under capital lease arrangements for which there are corresponding net assets of $258 million and $252 million classified within vehicles, net on the Company’s Consolidated Condensed Balance Sheets as of March 31, 2007 and December 31, 2006, respectively. Other. Borrowings under the Company’s other vehicle rental programs represent amounts issued under financing facilities that provide for the issuance of notes to support the acquisition of vehicles used in the Company’s international vehicle rental operations. The debt issued is collateralized by $838 million of vehicles and related assets and primarily represents floating rate bank loans and commercial paper for which the weighted average interest rate was 5% as of March 31, 2007 and December 31, 2006.

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The following table provides the contractual maturities of the Company’s debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding) at March 31, 2007:

Vehicle-Backed Capital Debt Leases Total

Within 1 year $ 1,432 $ 92 $ 1,524 Between 1 and 2 years 1,725 115 1,840 Between 2 and 3 years 803 37 840 Between 3 and 4 years 1,508 - 1,508 Between 4 and 5 years - - - Thereafter 686 - 686 $ 6,154 $ 244 $ 6,398 As of March 31, 2007, available funding under the Company’s vehicle programs (including related party debt due to Avis Budget Rental Car Funding) consisted of: Total Outstanding Available Capacity (a) Borrowings Capacity Debt due to Avis Budget Rental Car Funding $ 6,519 $ 5,554 $ 965 Budget Truck financing: Budget Truck Funding program 200 154 46 Capital leases 244 244 - Other 1,113 446 667 $ 8,076 $ 6,398 $ 1,678 ____________ (a) Capacity is subject to maintaining sufficient assets to collateralize debt. Debt agreements under the Company’s vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and indebtedness of material subsidiaries, mergers, limitations on liens, liquidators, and sale and leaseback transactions, and also require the maintenance or certain financial ratios. As of March 31, 2007, the Company is not aware of any instances of non-compliance with such financial or restrictive covenants.

9. Accumulated Other Comprehensive Income

The after-tax components of accumulated other comprehensive income are as follows: Unrealized Minimum Accumulated Currency Gains(Losses) Pension Other Translation on Cash Flow Liability Comprehensive Adjustments Hedges Adjustment Income(Loss) Balance, January 1, 2007 $ 70 $ 30 $ (30) $ 70 Current period change 9 (11) 0 (2) Balance, March 31, 2007 $ 79 $ 19 $ (30) $ 68

All components of accumulated other comprehensive income are net of tax except currency translation adjustments,

which exclude income taxes related to indefinite investments in foreign subsidiaries. 10. Stock-Based Compensation

The Company records compensation expense for all outstanding employee stock awards. The Company recorded pretax stock-based compensation expense of $4 million and $2 million ($2 million and $1 million, after tax) during first quarter 2007 and 2006, respectively, related to employee stock awards that were granted or modified by the Company.

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The activity related to the Company’s restricted stock units (RSUs) and stock option plans consisted of (in thousands of shares): Three Months Ended March 31, 2007 RSUs Options Weighted Weighted Average Number Average Number Exercise of RSUs Grant Price of Options (c) Price Balance at January 1, 2007 1,774 $ 24.33 697 $ 24.43 Granted at fair market value 1,138 25.85 - - Vested/exercised (a) - - (8) 26.16 Cancelled (52) 24.42 - - Balance at March 31, 2007 (b) 2,860 24.96 ______ 689 24.49 __________ (a) Stock options exercised during first quarter 2007 had insignificant intrinsic value. (b) As of March 31, 2007, the Company’s outstanding “in-the-money” stock options and RSUs had aggregate intrinsic value of

$2 million and $78 million, respectively. Aggregate unrecognized compensation expense related to outstanding stock options and RSUs amounted to $62 million as of March 31, 2007.

(c) All options outstanding as of March 31, 2007 are exercisable and have a weighted average remaining contractual life of 3.7 years.

The table below summarizes information regarding the Company’s outstanding and exercisable stock options as of March 31, 2007 (in thousands of shares):

Range of Number of Exercise Prices Options (*) Less than $20.00 168 $20.01 to $25.00 99 $25.01 to $30.00 335 $30.01 to $35.00 87 $35.01 and above - 689 __________ (*) All outstanding stock options vested in connection with the completion of the separation. As of March 31, 2007, the Company also had approximately 0.5 million outstanding stock appreciation rights with a weighted average exercise price of $24.40, a weighted average remaining contractual life of 6.3 years and unrecognized compensation expense of $4 million.

11. Commitments and Contingencies

Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers, which require the Company to purchase approximately $5.4 billion of vehicles from these manufacturers over the next two years. These commitments are subject to the vehicle manufacturers’ satisfying their obligations under the repurchase and guaranteed depreciation agreements. The Company featured suppliers for the Avis and Budget brands are General Motors Corporation and Ford Motor Company, respectively. The purchase of such vehicles is financed through the issuance of vehicle-backed debt in addition to cash received upon the sale of vehicles under repurchase and guaranteed depreciation programs.

Contingencies

The Company is also involved in claims, legal proceedings and governmental inquiries related to its vehicle rental operations, including contract disputes, business practices, intellectual property, environmental issues and other commercial, employment and tax matters, including breach of contract claims by licensees. The Company believes that it has adequately accrued for such matters as appropriate or, for matters not requiring accrual, believes that they will not have a material adverse effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur, which could have a material adverse effect on the Company’s results of operations or cash flows in a particular reporting period.

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Concentrations Concentrations of credit risk at March 31, 2007 include risks related to the Company’s repurchase and guaranteed depreciation agreements with General Motors Corporation and Ford Motor Company with respect to program cars that were sold and returned to the car manufacturers but for which the Company has not yet received payment.

12. Related Party Transactions

As a subsidiary of ABGI, the Company is involved in various relationships with ABGI and its other former subsidiaries. Following is a description of the Company’s transactions with ABGI and other related parties. Transactions with ABGI and affiliates Prior to 2007, the Company was allocated general corporate overhead expenses from ABGI for corporate-related functions based on a percentage of the Company’s forecasted revenues. General corporate overhead expense allocations included executive management, tax, insurance, accounting, legal and treasury services, purchasing, facilities, human resources, certain employee benefits, information technology, telecommunications, call centers and real estate usage. For the three months ended March 31, 2006, the Company was allocated $16 million of general corporate overhead expenses from ABGI, which were included within the general and administrative expenses line item on the accompanying Consolidated Condensed Statements of Income. Beginning January 2007, the Company discontinued the general corporate overhead expense allocation from ABGI. Instead the Company allocates to ABGI a percentage of the Company’s general and administrative overhead expenses that are related to publicly-traded company functions. The general and administrative expense allocations include executive management and benefits, legal, external reporting, financial planning, investor relations and audit and are based on a percentage of time devoted to ABGI public company functions. For the three months ended March 31, 2007, the Company allocated $2.2 million of general and administrative expenses to ABGI, which is reflected as a reduction of the selling, general and administrative expenses line item on the accompanying Consolidated Condensed Statement of Income. ABGI also incurs certain expenses which directly benefit the Company and are allocated to the Company in accordance with various intercompany agreements, which are based upon factors such as square footage, headcount and actual utilization of the services. Direct allocations include costs associated with human resources, insurance, facilities, finance, treasury, marketing, purchasing and corporate real estate. For the three months ended March 31, 2007 and 2006, the Company was allocated $0.4 million and $10 million, respectively, of expenses directly benefiting the Company, which are included in the general and administrative expenses line item on the accompanying Consolidated Condensed Statements of Income. In 2007 the allocation reflects only human resource services.

The Company believes the assumptions and methodologies underlying the allocations of general corporate overhead and direct expenses are reasonable. However, such expenses are not indicative of, nor is it practical or meaningful for the Company to estimate for all historical periods presented, the actual level of expenses that might have been incurred had the Company been operating as an independent company.

In addition to allocations received from ABGI, the Company earns revenue and incurs expenses in connection with the following business activities conducted with ABGI and its other former subsidiaries: (i) maintained marketing agreements with ABGI’s former timeshare resorts business whereby the Company permits ABGI’s timeshare resorts business to market its products to callers of the Company’s customer service line; (ii) maintained marketing agreements with ABGI’s former lodging business whereby ABGI’s lodging business permits the Company to market its products to customers calling into the lodging reservation system; (iii) utilized ABGI’s former relocation services business for employee relocation services, including relocation policy management, household goods moving services and departure and destination real estate related services; (iv) utilized corporate travel management services of ABGI’s former travel distribution business; and (v) through its Avis and Budget brands, functions as the exclusive primary and secondary supplier, respectively, of car rental services for all of ABGI’s employees. In connection with these activities, the Company incurred net expenses of $3 million during the three months ended March 31, 2006, which approximates the net fair value of the services provided by or to the Company. Upon the completion of the spin-offs of Realogy, Wyndham, and the sale of Travelport in the third quarter 2006, these relationships were no longer considered related party transactions. Prior to 2007, ABGI provided the Company with certain information technology support, software, hardware and telecommunications services, primarily from ABGI’s data center in Denver, Colorado and through contracts with third party licensors and hardware and service providers. ABGI allocated the costs for these services to the Company based on the actual usage and the level of support the Company receives from ABGI and its service providers using pre-

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determined rates. The Company incurred information technology expenses of $2 million and $13 million during the three months ended March 31, 2007 and 2006, respectively. The Company incurred telecommunications expenses of $0.1 million and $7 million during the three months ended March 31, 2007 and 2006, respectively. For 2007, the majority of these costs now reside within the Company. All such expenses approximate the net fair value of the goods and services provided to the Company. The Company has entered into a global distribution system agreement with ABGI’s former travel distribution business in which the Company provides car rental rates for distribution through its global distribution system and tour package programs. Under this agreement, the Company pays a negotiated fee to Galileo, a former subsidiary of ABGI’s travel distribution business, for each car rental reservation booked through its global distribution system. In connection with this agreement, the Company incurred expenses of approximately $2 million during the three months ended March 31, 2006. Upon the completion of the sale of Travelport in the third quarter 2006, this relationship was no longer considered a related party transaction. During February 2006, the Company settled a litigation matter with respect to claims made by a purchaser of a business sold by the Company prior to ABGI’s acquisition of the Company in 2001. The amount awarded for the settlement was fully reserved for in connection with the acquisition. The settlement was paid by ABGI in May 2006. Included within total expenses on the Company’s Consolidated Condensed Statements of Income are the following items charged by ABGI and its affiliates: Three Months Ended March 31, 2007 2006 Rent, corporate overhead allocations and other $ - $ 29 Information technology and telecommunications (a) 2 20 Reservations (b) - 2 Interest (income) expense on amounts due to/(from) ABGI

and affiliates, net (c) - (14) Total $ 2 $ 37 ____________

(a) Included within operating expenses, net on the Company’s Consolidated Condensed Statements of Income. (b) Included within selling, general and administration expenses on the Company’s Consolidated Condensed Statements of Income. (c) Included within non-vehicle interest expense (income), net on the Company’s Consolidated Condensed Statements of Income.

Includes $14 million of intercompany interest income related to tax benefits and working capital advances during the three months ended March 31, 2006. The remaining balances relate to other intercompany activity with ABGI.

Due from (to) ABGI and affiliates, consisted of:

As of As of March 31, December 31,

2007 2006 Due from (to) ABGI-income taxes (a) $ 120 $ (39)

Due to ABGI-working capital and trading, net (b) (87) (115) Total due from (to) ABGI and affiliates, net $ 33 $ (154)

____________ (a) Represents primarily amount due from (to) ABGI for income taxes as a result of the Company’s inclusion in ABGI’s

consolidated federal tax return. (b) Represents net advances of excess working capital between the Company and ABGI.

13. Segment Information

The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and “EBITDA,” which is defined as income from continuing operations before non-vehicle related depreciation

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and amortization, non-vehicle related interest and income taxes. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies. Three Months Ended March 31, 2007 2006 Revenues (a) EBITDA Revenues (a) EBITDA Domestic Car Rental $ 1,084 $ 50 $ 1,044 $ 31 International Car Rental 191 24 174 23 Truck Rental 83 (10) 101 1 Total Company $ 1,358 64 $ 1,319 55 Less: Non-vehicle related depreciation and amortization 23 18 Interest expense related to corporate debt, net (b) 34 - Income before income taxes $ 7 $ 37 __________ (a) Inter-segment total revenues were not significant to the revenue of any one segment. (b) Does not reflect intercompany interest income of $14 million in first quarter 2006 related to tax benefits and working capital advances, which are included within EBITDA. Since December 31, 2006, there have been no significant changes in segment assets with the exception of the Company’s Domestic Car Rental segment, for which assets under vehicle programs amounted to approximately $8.7 billion and approximately $7.7 billion at March 31, 2007 and December 31, 2006, respectively.

14. Subsequent Event

On April 3, 2007, ABGI filed a registration statement with the Securities and Exchange Commission to enable holders of the Company’s Floating Rate Senior Notes due 2014, 7⅝% Senior Notes due 2014 and 7¾% Senior Notes due 2016 to exchange those notes for registered notes under the Securities Act.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying notes thereto and our 2006 Consolidated Financial Statements and accompanying notes thereto included elsewhere herein. Unless otherwise noted, all dollar amounts are in millions and those relating to our results of operations are presented before taxes. We operate two of the most recognized brands in the global vehicle rental industry through Avis Rent A Car System, LLC and Budget Rent A Car System, Inc. We provide car and truck rentals and ancillary services to businesses and consumers in the United States and internationally. We operate in the following business segments:

• Domestic Car Rental—provides car rentals and ancillary products and services in the United States. • International Car Rental—provides car rentals and ancillary products and services primarily in Canada, Argentina,

Australia, New Zealand, Puerto Rico, and the U.S. Virgin Islands.

• Truck Rental—provides truck rentals and related services to consumers and light commercial users in the United States.

Our revenues are derived principally from car and truck rentals in our Company-owned operations and include (i) time and mileage (“T&M”) fees charged to our customers for vehicle rentals, (ii) reimbursement from our customers for certain operating expenses we incur, including gasoline and vehicle licensing fees, as well as airport concession fees, which we pay in exchange for the right to operate at airports and other locations, and (iii) sales of loss damage waivers and insurance, and rentals of navigation units and other items in conjunction with vehicle rentals. We also earn royalty revenue from our franchisees in conjunction with their vehicle rental transactions. Car rental volumes are closely associated with the travel industry, particularly airline passenger volumes, or enplanements. Because we operate primarily in the United States and generate a significant portion of our revenue from our on-airport operations, we expect that our ability to generate revenue growth will be somewhat dependent on increases in domestic enplanements. We have also experienced significant per-unit fleet cost increases on model-year 2006 and 2007 vehicles, which have negatively impacted our margins. Accordingly, our ability to achieve profit margins consistent with prior periods remains dependent on our ability to successfully reflect corresponding changes in our pricing programs. Our vehicle rental operations are seasonal. Historically, the third quarter of the year has been our strongest quarter due to the increased level of leisure travel and household moving activity. Any occurrence that disrupts rental activity during the third quarter could have a disproportionately material adverse effect on our results of operations. We have a predominantly variable cost structure and routinely adjust the size and, therefore, the cost of our rental fleet in response to fluctuations in demand. However, certain expenses, such as rent, are fixed and cannot be reduced in response to seasonal fluctuations in our operations. We believe that the following trends, among others, may affect and/or have impacted our financial condition and results of operations:

• Domestic enplanements, which remained relatively flat compared to first quarter 2006, but are expected to increase modestly in 2007, assuming there are no major disruptions in travel;

• Rising per-unit car fleet costs, which we began to experience in 2005 and anticipate will continue with model-year 2008 vehicles;

• Pricing increases, which we instituted throughout 2006 in response to rising fleet costs and intend to continue to pursue, where appropriate;

• Our continued expansion in off-airport, or local market segments, including insurance replacement rentals; • Legislative changes in certain states that enable us to recover a greater percentage of airport concession and vehicle

licensing fees, which will continue to favorably impact our year-over-year results throughout 2007; and • Demands for truck rentals, which can be impacted by household moving activity.

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RESULTS OF OPERATIONS Discussed below are the results of operations for each of our reportable segments. The reportable segments presented below represent our operating segments for which separate financial information is available and utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments based upon revenue and “EBITDA”, which we define as income before income taxes, non-vehicle depreciation and amortization and interest on corporate debt, net (other than intercompany interest related to tax benefits and working capital advances). Our presentation of EBITDA may not be comparable to similarly titled measures used by other companies. We measure performance using the following key operating statistics: (i) rental days, which represent the total number of days (or portion thereof) a vehicle was rented, and (ii) T&M revenue per rental day, which represents the average daily revenue we earned from rental and mileage fees charged to our customers. Our car rental operating statistics (rental days and T&M revenue per rental day) are all calculated based on the actual usage of the vehicle during a 24-hour period. We believe that this methodology, while conservative, provides our management with the most relevant statistics in order to manage the businesses. Our calculation may not be comparable to other companies’ calculation of similarly titled statistics. Three Months Ended March 31, 2007 vs. Three Months Ended March 31, 2006 Revenues EBITDA % % 2007 2006 Change 2007 2006 Change Domestic Car Rental $ 1,084 $ 1,044 4% $ 50 $ 31 61 % International Car Rental 191 174 10 24 23 4 Truck Rental 83 101 (18) (10) 1 * Total Company $ 1,358 $ 1,319 3 64 55 16 Less: Non-vehicle related depreciation and amortization 23 18 Interest expense related to corporate debt, net (a) 34 - Income before income taxes $ 7 $ 37 ____________ (*) Not meaningful. (a) Does not include intercompany interest income of $14 million in 2006 related to tax benefits and working capital advances, which are included within EBITDA. Domestic Car Rental Revenues and EBITDA increased $40 million (4%) and $19 million (61%), respectively, in first quarter 2007 compared with first quarter 2006. We achieved higher EBITDA margins principally due to higher ancillary revenues and lower expenses in certain categories in 2007 compared to 2006. The revenue increase of $40 million was comprised of a $17 million (2%) increase in T&M revenue and a $23 million (12%) increase in ancillary revenues. The increase in T&M revenue includes a $12 million (8%) increase in off airport revenue and was principally driven by a 2% increase in T&M revenue per day, while there was no change in rental days. The favorable effect of incremental T&M revenues was offset in EBITDA by $27 million (10%) of increased fleet depreciation and lease charges primarily resulting from increased per-unit fleet costs in 2007 for model-year 2007 vehicles compared to model-year 2006 vehicles. The average size of our domestic rental fleet decreased by 1%. The increase in per-unit fleet costs was mitigated by an increase in the portion of our car rental fleet that is not subject to manufacturer repurchase and guaranteed depreciation agreements. We incurred $7 million less vehicle-related interest expense during first quarter 2007 compared to first quarter 2006, primarily due to a reduction in outstanding vehicle related debt, partially offset by increased interest rates and the absence in 2007 of $13 million of intercompany interest income earned in 2006. The quarter-over-quarter reduction in outstanding vehicle related debt resulted from the repayment of such debt with the proceeds from our corporate borrowings in April 2006. Interest expense related to corporate debt is not included in EBITDA, whereas interest related to vehicle-backed debt is included in EBITDA. The $23 million increase in ancillary revenues was due primarily to (i) a $13 million increase in counter sales of insurance, rentals of GPS navigation units and other items and (ii) a $10 million increase in airport concession and vehicle licensing revenues, $2 million of which was offset in EBITDA by higher airport concession and vehicle licensing expenses remitted to airport and other regulatory authorities. EBITDA also reflects (i) $7 million of lower gasoline expenses due to both lower

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gasoline costs and a $4 million benefit from gasoline hedges we entered in late 2006 and (ii) a $6 million decrease in certain administrative expenses, consisting primarily of corporate allocations. These cost decreases were partially offset by (i) an $8 million increase in incentive compensation expenses and (ii) $2 million of separation related charges we incurred during 2007 primarily related to professional and consulting fees. International Car Rental Revenues and EBITDA increased $17 million (10%) and $1 million (4%), respectively, in first quarter 2007 compared with first quarter 2006, primarily due to increased car rental pricing and higher demand for car rentals. The revenue increase of $17 million was comprised of a $12 million (9%) increase in car rental T&M revenue and a $5 million (11%) increase in ancillary revenues. The increase in T&M revenue was principally driven by a 6% increase in T&M revenue per day and a 3% increase in the number of days a car was rented. The favorable effect of incremental T&M revenues was partially offset in EBITDA by $2 million (5%) of increased fleet depreciation and lease charges principally resulting from an increase of 5% in the average size of our international rental fleet. The $5 million increase in ancillary revenues was due primarily to a $3 million increase in counter sales of insurance and other items and (ii) a $2 million increase in airport concession and vehicle licensing revenues, all of which was offset in EBITDA by higher airport concession and vehicle licensing expenses remitted to airport and other regulatory authorities. EBITDA also reflects (i) $5 million of incremental expenses primarily representing inflationary increases in rent, salaries and wages and other costs, (ii) $2 million of higher operating expenses primarily due to increased car rental volume and fleet size, including vehicle maintenance and damage costs and (iii) $2 million of increased gasoline expenses. The increases discussed above also include a $6 million increase in revenue related to favorable foreign currency exchange rate fluctuations, which was substantially offset in EBITDA by the opposite impact of foreign currency exchange rate fluctuations on expenses. Truck Rental Revenues and EBITDA declined $18 million (18%) and $11 million, respectively, for first quarter 2007 compared with first quarter 2006, primarily reflecting decreases in rental day volume and T&M revenue per day. EBITDA was also impacted by increased fleet costs. Substantially all of the revenue decrease of $18 million was due to a decrease in T&M revenue, which reflected a 17% reduction in rental days and a 5% decrease in T&M per day. The 17% reduction in rental days resulted primarily from declines in commercial volumes and a 7% reduction in the average size of our rental fleet. We believe these decreases reflect a soft housing market, increased gasoline prices and growing competition in the commercial segment. Despite the reduction in the average size of our truck rental fleet, we incurred $2 million (7%) of incremental fleet depreciation, interest and lease charges primarily due to higher per-unit fleet costs. These items were offset by (i) a decrease of $4 million in credit card and other commission expense partially associated with the decrease in T&M revenue, (ii) a $2 million reduction in operating expenses primarily due to operating a smaller and more efficient fleet and reduced rental volumes and (iii) a $2 million decrease in our public liability and property damage costs as a result of more favorable claims experience and a reduction in rental days.

LIQUIDITY AND CAPITAL RESOURCES

We present separately the financial data of our vehicle programs. These programs are distinct from our other activities as the assets are generally funded through the issuance of debt that is collateralized by such assets. Assets under vehicle programs are funded through borrowings under asset-backed funding or other similar arrangements. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of our vehicle programs. We believe it is appropriate to segregate the financial data of our vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets. Liquidity and Capital Resources Our principal sources of liquidity are cash on hand and our ability to generate cash through operations and financing activities, including available funding arrangements and committed credit facilities, each of which is discussed below.

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Cash Flows At March 31, 2007, we had $201 million of cash on hand, an increase of $71 million from $130 million at December 31, 2006. The following table summarizes such increase: Three Months Ended March 31, 2007 2006 Change Cash provided by (used in): Operating activities $ 381 $ 276 $ 105 Investing activities (1,434) (884) (550) Financing activities 1,124 617 507 Effects of exchange rate changes - (1) 1 Net change in cash and cash equivalents $ 71 $ 8 $ 63 During first quarter 2007, we generated $105 million more cash from operating activities in comparison to first quarter 2006, primarily as a reduction in working capital requirements. We used $550 million more cash in investing activities during first quarter 2007 compared with first quarter 2006. This change primarily reflects the activities of our vehicle programs, which use $551 million more cash in first quarter 2007 due to timing of vehicle purchases within our Domestic Car Rental Car Rental operations and due to current and projected increases in demand. Our capital expenditures in first quarter 2007 were relatively consistent with first quarter 2006, and are anticipated to approximate $75 million to $85 million in 2007. We generated $507 million more cash from financing activities during first quarter 2007 in comparison with first quarter 2006. This change primarily reflects a $551 million increase in net borrowings under our vehicle programs to fund the acquisition of vehicles discussed above. These incremental cash inflows were partially offset by the utilization of $19 million to repay corporate debt during first quarter 2007. Debt and Financing Arrangements At March 31, 2007, we had approximately $8.2 billion of indebtedness (including corporate indebtedness of approximately $1.8 billion and debt under vehicle programs of approximately $6.4 billion). Corporate indebtedness consisted of: As of As of

Maturity March 31, December 31, Date 2007 2006 Change Floating rate term loan April 2012 $ 819 $ 838 $ (19) Floating rate notes May 2014 250 250 - 7⅝ % notes May 2014 375 375 - 7¾ % notes May 2016 375 375 - $ 1,819 $ 1,838 $ (19)

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The following table summarizes the components of our debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding (AESOP), LLC): As of As of March 31, December 31, 2007 2006 Change Avis Budget Rental Car Funding (a) $ 5,554 $ 4,511 $ 1,043 Budget Truck financing: Budget Truck Funding program 154 135 19 Capital leases 244 257 (13) Other (b) 446 367 79 $ 6,398 $ 5,270 $ 1,128 ____________ (a) The change in the balance at March 31, 2007 principally reflects increased borrowings under our extendible commercial paper

program and conduit facility during first quarter 2007 to support the acquisition of rental vehicles within our domestic car rental operations.

(b ) The change in the balance at March 31, 2007 primarily reflects incremental borrowings under our bank loan and commercial paper conduit facilities to support the acquisition of vehicles in our international operations. As of March 31, 2007, the committed credit facility available to the Company were as follows: Total Outstanding Letters of Available Capacity Borrowings Credit Issued Capacity $1.5 billion revolving credit facility (a) $ 1,500 $ - $ 343 $ 1,157 ____________ (a) This secured revolving credit facility was entered into in April 2006, has a five year term and currently bears interest at one month

LIBOR plus 125 basis points. The following table presents available funding under our debt arrangements related to our vehicle programs at March 31, 2007: Total Outstanding Available Capacity (a) Borrowings Capacity Debt due to Avis Budget Rental Car Funding (b) $ 6,519 $ 5,554 $ 965 Budget Truck Financing: Budget Truck Funding program (c) 200 154 46 Capital leases (d) 244 244 - Other (e) 1,113 446 667 $ 8,076 $ 6,398 $ 1,678 ____________ (a) Capacity is subject to maintaining sufficient assets to collateralize debt. (b) The outstanding debt is collateralized by approximately $7.5 billion of underlying vehicles (the majority of which are subject to

manufacturer repurchase or guaranteed depreciation agreements) and related assets. (c) The outstanding debt is collateralized by approximately $164 million of underlying vehicles and related assets. (d) In connection with these capital leases, there are corresponding unamortized assets of $258 million classified within vehicles, net on

our Consolidated Condensed Balance Sheet as of March 31, 2007. (e) The outstanding debt is collateralized by $838 million of vehicles and related assets. LIQUIDITY RISK We believe that access to our existing financing arrangements is sufficient to meet liquidity requirements for the foreseeable future. Our primary liquidity needs include the payment of operating expenses, corporate and vehicle related debt and the procurement of rental vehicles to be used in our operations. Our primary sources of funding are operating revenue, cash received upon the sale of vehicles under repurchase and guaranteed depreciation programs, borrowings under our vehicle-backed borrowing arrangements, and revolving credit and other corporate borrowing programs. Our liquidity position may be negatively affected by unfavorable conditions in the vehicle rental industry. Additionally, our liquidity as it relates to vehicle programs could be adversely affected by (i) the deterioration in the performance of the underlying assets of such programs or (ii) increased costs associated with the principal financing program for our vehicle rental subsidiaries if General Motors Corporation or Ford Motor Company is not able to honor its obligations to repurchase or guarantee the depreciation on the related vehicles. Access to our credit facilities may be limited if we were to fail to meet certain financial ratios or other requirements.

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Additionally, we monitor the maintenance of required financial ratios and, as of March 31, 2007, we were in compliance with all financial covenants under our credit facilities. CONTRACTUAL OBLIGATIONS Our future contractual obligations have not changed significantly from the amounts reported at December 31, 2006 with the exception of our commitment to purchase vehicles, which decreased by approximately $2.6 billion from the amount previously disclosed to approximately $5.4 billion at March 31, 2007. Any changes to our obligations related to corporate indebtedness and debt under vehicle programs are presented above within the section titled “Liquidity and Capital Resources – Debt and Financing Arrangements” and also within Note 7 and 8 to our Consolidated Condensed Financial Statements. As of March 31, 2007, our liability for unrecognized tax benefits totaled $9 million including the impact of the adoption of FIN 48. A reduction in the unrecognized tax benefits may occur upon settlement with tax authorities. The periods in which such liability would be settled with the respective tax authorities are not reasonably ascertainable. . ACCOUNTING POLICIES The results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex. However, in presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions that we are required to make pertain to matters that are inherently uncertain as they relate to future events. Presented within the section entitled “Summary of Significant Accounting Policies” of our 2006 Annual Report (Exhibit No. 1) are the accounting policies (related to goodwill and other indefinite-lived intangible assets, income taxes, financial instruments, public liability, property damage and other insurance liabilities) that we believe require subjective and/or complex judgments that could potentially affect 2007 reported results. There have been no significant changes to those accounting policies or our assessment of which accounting policies we would consider to be critical accounting policies. During first quarter 2007, we adopted the following standard as a result of the issuance of a new accounting pronouncement:

• FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”

We will adopt the following recently issued standards as required:

• SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” • SFAS No. 157, “Fair Value Measurements”

For detailed information regarding these pronouncements and the impact thereof on our business, see Note 1 to our Consolidated Condensed Financial Statements.

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Exhibit 1

Exhibit Index

Exhibit No. Description 1 Avis Budget Car Rental, LLC 2006 Consolidated Financial Statements

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Index to financial statements

Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Statements of Income for the years ended December 31, 2006, 2005, 2004 F-3 Consolidated Balance Sheets as of December 31, 2006 and 2005 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 F-5 Consolidated Statements of Stockholder’s Equity for the years ended December 31, 2006, 2005 and 2004 F-7 Notes to Consolidated Financial Statements F-8

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INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Stockholder of Avis Budget Car Rental, LLC Parsippany, NJ 07054 We have audited the accompanying consolidated balance sheets of Avis Budget Car Rental, LLC and subsidiaries (a wholly-owned subsidiary of Avis Budget Group, Inc., formerly Cendant Corporation) (“the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2006 and 2005, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, in 2006 the Company revised the presentation of its Consolidated Balance Sheets to segregate current and non-current assets and liabilities. As discussed in Note 2 to the consolidated financial statements, (i) in 2006 the Company changed its accounting for how it records the utilization of its net operating loss carryforwards by other entities within the ownership structure of its parent; and (ii) in 2005 the Company adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations-an interpretation of FASB Statement No. 143,” effective December 31, 2005. Included in Note 18 to the consolidated financial statements is a summary of transactions with related parties. /s/ Deloitte & Touche LLP New York, New York March 30, 2007

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Avis Budget Car Rental, LLC CONSOLIDATED STATEMENTS OF INCOME

(In millions)

Year Ended December 31, 2006 2005 2004 Revenues Vehicle rental $ 4,519 $ 4,302 $ 3,860 Other 1,109 1,014 849 Net revenues 5,628 5,316 4,709 Expenses Operating, net 2,888 2,735 2,429 Vehicle depreciation and lease charges, net 1,416 1,238 988 Selling, general and administrative 624 621 583 Vehicle interest, net 320 309 244 Non-vehicle related depreciation and amortization 86 80 73 Interest expense related to corporate debt, net 73 (20) 8 Separation costs 23 - - Restructuring charges 8 - - Total expenses 5,438 4,963 4,325 Income before income taxes 190 353 384 Provision for income taxes 105 129 147 Income before cumulative effect of accounting change 85 224 237 Cumulative effect of accounting change, net of tax - (8) - Net income $ 85 $ 216 $ 237

See Notes to Consolidated Financial Statements.

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Avis Budget Car Rental, LLC CONSOLIDATED BALANCE SHEETS

(In millions)

December 31, 2006 2005 Assets Current assets: Cash and cash equivalents $ 130 $ 58 Receivables (net of allowance for doubtful accounts of $20 and $20) 367 348 Deferred income taxes - 139 Other current assets 181 157 Due from Avis Budget Group, Inc. and affiliates, net - 802 Total current assets 678 1,504

Property and equipment, net 486 438 Deferred income taxes 173 68 Goodwill 2,193 2,188 Other intangibles, net 738 730 Other non-current assets 61 61 Total assets exclusive of assets under vehicle programs 4,329 4,989

Assets under vehicle programs: Program cash 14 15 Vehicles, net 7,049 7,509 Receivables from vehicle manufacturers and other 276 602 Investment in Avis Budget Rental Car Funding (AESOP) LLC – related party 361 374 7,700 8,500 Total assets $ 12,029 $ 13,489

Liabilities and stockholder’s equity Current liabilities: Accounts payable and other current liabilities $ 655 $ 829 Current portion of long-term debt 25 1 Deferred income taxes 2 - Due to Avis Budget Group, Inc. and affiliates, net 154 - Total current liabilities 836 830

Long-term debt 1,813 - Other non-current liabilities 390 448 Total liabilities exclusive of liabilities under vehicle programs 3,039 1,278

Liabilities under vehicle programs: Debt 759 952 Debt due to Avis Budget Rental Car Funding (AESOP) LLC—related party 4,511 6,932 Deferred income taxes 1,206 1,139 Other 203 214 6,679 9,237 Commitments and contingencies (Note 13)

Stockholder’s equity: Common stock, $.01 par value—authorized 1,000 shares; issued and outstanding 100 shares - - Additional paid-in capital 1,170 1,919 Retained earnings 1,071 986 Accumulated other comprehensive income 70 69 Total stockholder’s equity 2,311 2,974

Total liabilities and stockholder’s equity $ 12,029 $ 13,489

See Notes to Consolidated Financial Statements.

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Avis Budget Car Rental, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

Year Ended December 31, 2006 2005 2004 Operating Activities Net income $ 85 $ 216 $ 237 Cumulative effect of accounting change, net of tax - 8 -

Income before cumulative effect of accounting change 85 224 237

Adjustments to reconcile income before cumulative effect of accounting change to net cash provided by operating activities exclusive of vehicle programs: Non-vehicle related depreciation and amortization 86 80 73 Deferred income taxes 103 84 145 Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: Receivables (35) (4) (15) Accounts payable and other current liabilities (84) 29 (11) Other, net (48) (55) (36)

Net cash provided by operating activities exclusive of vehicle programs 107 358 393 Vehicle programs: Vehicle depreciation 1,362 1,191 941 Net cash provided by operating activities 1,469 1,549 1,334 Investing activities Property and equipment additions (83) (88) (84) Net assets acquired (net of cash acquired) and acquisition-related payments (118) (211) (86) Proceeds received on asset sales 26 28 30 Other, net (1) 60 9 Net cash used in investing activities exclusive of vehicle programs (176) (211) (131) Vehicle programs: Decrease (increase) in program cash 1 (15) 31 Investment in vehicles (11,348) (11,214) (10,373) Payments received on investment in vehicles 10,790 8,869 8,882 Other, net (12) (22) (9) (569) (2,382) (1,469) Net cash used in investing activities (745) (2,593) (1,600)

Financing activities Proceeds from borrowings 1,875 - - Principal payments on borrowings (39) (4) (332) Decrease (increase) in due from Avis Budget Group, Inc. and affiliates, net 161 (210) 171 Capital contribution 15 - - Other, net (35) - -

Net cash provided by (used in) financing activities exclusive of vehicle programs 1,977 (214) (161) Vehicle programs: Proceeds from borrowings 10,979 10,246 9,568 Principal payments on long term borrowings (13,310) (9,149) (9,185) Net change in short term borrowings (282) 81 81 Other, net (15) (15) (11) (2,628) 1,163 453 Net cash (used in) provided by financing activities (651) 949 292

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Avis Budget Car Rental, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In millions)

Year Ended December 31, 2006 2005 2004 Effect of changes in exchange rates on cash and cash equivalents (1) (1) 4

Net increase (decrease) in cash and cash equivalents 72 (96) 30 Cash and cash equivalents, beginning of period 58 154 124

Cash and cash equivalents, end of period $ 130 $ 58 $ 154

Supplemental Disclosure of Cash Flow Information Interest payments $ 406 $ 309 $ 261 Income tax payments, net $ 28 $ 30 $ 36 Non-cash transaction-(forgiveness from)/contribution to capital via intercompany account (764) 3 907

See Notes to Consolidated Financial Statements.

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Avis Budget Car Rental, LLC CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(In millions)

Accumulated Additional Other Paid-in Retained Comprehensive Capital Earnings Income Total Balance at January 1, 2004 $ 1,009 $ 533 $ 36 $ 1,578

Comprehensive income: Net income - 237 - Currency translation adjustment - - 17 Unrealized gains on cash flow hedges, net of tax of $16 - - 27 Reclassification for gains on cash flow hedges, net of tax of $(4) - - (8) Minimum pension liability adjustment, net of tax of $(1) - - (1)

Total comprehensive income 272

Capital contribution from Avis Budget Group, Inc. 907 - - 907 Balance at December 31, 2004 $ 1,916 $ 770 $ 71 $ 2,757 Comprehensive income: Net income - 216 - Currency translation adjustment, - - (9) Unrealized gains on cash flow hedges, net of tax of $16 - - 27 Minimum pension liability adjustment, net of tax of $(11) - - (20)

Total comprehensive income 214

Capital contribution from Avis Budget Group, Inc. 3 - - 3 Balance at December 31, 2005 $ 1,919 $ 986 $ 69 $ 2,974 Comprehensive income: Net income - 85 - Currency translation adjustment - - 16 Unrealized losses on cash flow hedges, net of tax of $(6) - - (11) Total comprehensive income 90

Cumulative effect of adoption of SFAS No.158, net of tax of $(2) - - (4) (4) Capital contribution from Avis Budget Group, Inc. 62 - - 62 Forgiveness of amounts due from Avis Budget Group, Inc. (811) - - (811)

Balance at December 31, 2006 $ 1,170 $ 1,071 $ 70 $ 2,311

See Notes to Consolidated Financial Statements.

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Avis Budget Car Rental, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts are in millions) 1. Basis of Presentation

Avis Budget Car Rental, LLC (the “Company”), a wholly-owned subsidiary of Avis Budget Group, Inc. (formerly Cendant Corporation) (“ABGI”), provides car and truck rentals and ancillary services to businesses and consumers in the United States and internationally. The Company operates in the following business segments: The Company operates in the following business segments:

• Domestic Car Rental—provides car rentals and ancillary products and services in the United States.

• International Car Rental—provides car rentals and ancillary products and services primarily in Canada,

Argentina, Australia, New Zealand, Puerto Rico, and the U.S. Virgin Islands. • Truck Rental—provides truck rentals and related services to consumers and light commercial users in the

United States. The accompanying Consolidated Financial Statements include the accounts and transactions of Avis Rent A Car System, LLC (“Avis”) and Budget Rent A Car System, Inc. (“Budget”), both of which are wholly-owned subsidiaries of the Company. In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. During fourth quarter 2006, the Company revised the presentation of its Consolidated Balance Sheets to segregate current and non-current assets and liabilities, which is consistent with the presentation utilized by ABGI. Certain corporate and general and administrative expenses (including those related to executive management, tax, insurance, accounting, legal and treasury services, purchasing, facilities, human resources, certain employee benefits, information technology, telecommunications, call centers, marketing and real estate usage) have been allocated by ABGI to the Company based on forecasted revenues, headcount or actual utilization of the services, as applicable. Management believes such allocations are reasonable. However, the associated expenses recorded by the Company in the accompanying Consolidated Statements of Income may not be indicative of the actual expenses that might have been incurred had the Company performed these functions using internal resources or purchased services. Refer to Note 18—Related Party Transactions, for a detailed description of the Company’s transactions with ABGI. Vehicle Programs. The Company presents separately the financial data of its vehicle programs. These programs are distinct from the Company’s other activities since the assets are generally funded through the issuance of debt that is collateralized by such assets. Assets under vehicle programs are funded through borrowings under asset-backed funding or other similar arrangements. The income generated by these assets is used, in part, to repay the principal and interest associated with the debt. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of the Company’s vehicle programs. The Company believes it is appropriate to segregate the financial data of its vehicle programs because, ultimately, the source of repayment of such debt is the realization of such assets. Separation Plan. From October 2005 to July 2006, the Board of Directors of ABGI approved a plan to separate ABGI into four independent companies, one for each of ABGI’s Hospitality Services (including Timeshare Resorts) (Wyndham Worldwide Corporation), Real Estate Services (Realogy Corporation), Travel Distribution Services (Travelport) and Vehicle Rental (Avis Budget Group, Inc.) businesses.

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On July 31, 2006, ABGI completed the spin-offs of Realogy Corporation and Wyndham Worldwide Corporation in a tax-free distribution of one share each of Realogy and Wyndham common stock for every four and five shares, respectively, of outstanding Cendant common stock held on July 21, 2006. On August 23, 2006, ABGI completed the sale of Travelport for net proceeds of approximately $4.1 billion, of which approximately $1.8 billion was utilized to repay debt related to Travelport. Pursuant to the Separation and Distribution Agreement among Travelport, Realogy and Wyndham, during third quarter 2006, ABGI distributed approximately $2.2 billion of such proceeds to Realogy and Wyndham. The Company continues to be wholly-owned by ABGI. In connection with the execution of the separation plan, the Company and/or its parent have entered into certain agreements with the separated businesses, including the following:

• Tax-sharing, in which responsibility for historical tax obligations has been apportioned and Realogy and Wyndham share responsibility for certain contingent tax liabilities;

• Cross-marketing, which seeks to contractually replicate the revenue synergies that have existed among the

various businesses;

• Cross-indemnification, in which each entity retained responsibility for its own business liabilities, Realogy and Wyndham, which exclude the Company and its subsidiaries, assumed primary responsibility for certain contingent corporate-level liabilities and the benefit of certain contingent corporate-level assets were apportioned among the separated businesses; and

• Separation and transition services, which cover various logistical and administrative issues related to the

separation, including short-term provision of information technology services and shared facilities. During the 2006, the Company incurred separation related charges of $23 million in connection with this plan, consisting primarily of employee stock-based compensation charges and other employee costs. Additionally, the Company eliminated $811 million of intercompany receivables from ABGI. In connection with the separation plan, during April 2006, the Company issued $1.0 billion of fixed and floating rate senior unsecured notes and borrowed $875 million under a new $2.4 billion secured facility consisting of a $1.5 billion revolving credit facility with a five-year maturity and a term loan of $875 million with a six-year maturity (see Note 11 – Long-term Debt and Borrowing Arrangements for further information).

2. Summary of Significant Accounting Policies

CONSOLIDATION POLICY In addition to consolidating entities in which the Company has a direct or indirect controlling financial interest, the Company evaluates the consolidation of entities to which common conditions of consolidation, such as voting interests and board representation, do not apply. The Company performs this evaluation pursuant to FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). FIN 46R concludes that, in the absence of clear control through voting interests, board representation or similar rights, a company’s exposure, or variable interest, to the economic risks and potential rewards associated with its interest in the entity is the best evidence of control. In connection with FIN 46R, when evaluating an entity for consolidation, the Company first determines whether an entity is within the scope of FIN 46R and if it is deemed to be a variable interest entity (“VIE”). If the entity is considered to be a VIE, the Company determines whether it would be considered the entity’s primary beneficiary. The Company consolidates those VIEs for which it has determined that it is the primary beneficiary. Generally, the Company will consolidate an entity not deemed either a VIE or qualifying special purpose entity (“QSPE”) upon a determination that its ownership, direct or indirect, exceeds fifty percent of the outstanding voting shares of an entity and/or that it has the ability to control the financial or operating policies through its voting rights, board representation or other similar rights. For entities where the Company does not have a controlling interest (financial or operating), the investments in such entities are classified as available-for-sale securities or accounted for using the equity or cost method, as appropriate. The Company applies the equity method of accounting when it has the ability to exercise significant influence over operating and financial policies of an investee in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

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REVENUE RECOGNITION The Company operates and franchises the Avis and Budget rental systems, providing vehicle rentals to business and leisure travelers and others. Revenue from vehicle rentals is recognized over the period the vehicle is rented. Franchise revenue principally consists of royalties received from the Company’s franchisees in conjunction with vehicle rental transactions. Royalties are accrued as the underlying franchisee revenue is earned (generally over the rental period of a vehicle). Revenue from the sale of gasoline is recognized over the period the vehicle is rented and is based on the volume of gasoline consumed during the rental period or a contracted fee paid by the customer at the time the vehicle rental agreement is executed. The Company is reimbursed by its customers for certain operating expenses it incurs, including gasoline and vehicle licensing fees, as well as airport concession fees, which the Company pays in exchange for the right to operate at airports and other locations. Revenues and expenses associated with gasoline, vehicle licensing and airport concessions are recorded on a gross basis within revenue and operating expenses, respectively, on the accompanying Consolidated Statements of Income. VEHICLE DEPRECIATION AND LEASE CHARGES, NET Vehicles are stated at cost, net of accumulated depreciation. The initial cost of the vehicles is net of incentives and allowances from vehicle manufacturers. The Company acquires the majority of its rental vehicles pursuant to repurchase and guaranteed depreciation programs established by automobile manufacturers. Under these programs, the manufacturers agree to repurchase vehicles at a specified price and date or guarantee the depreciation rate for a specified period of time, subject to certain eligibility criteria (such as car condition and mileage requirements). The Company depreciates vehicles such that the net book value of the vehicles on the date of return to the manufacturers is intended to equal the contractual guaranteed residual values, thereby minimizing any gain or loss on the sale of the vehicles. The Company records depreciation expense for any expected deficiency in the contractual guaranteed residual values due to excessive wear or damages. At December 31, 2006, the Company estimates that the difference between the contracted guaranteed residual value and the carrying value of these vehicles was $67 million, which has already been reflected in the Company’s Consolidated Statement of Income. The Company also acquires a portion of its rental vehicles outside of manufacturer repurchase and guaranteed depreciation programs. These vehicles are depreciated based upon their estimated residual values at their expected dates of disposition, after giving effect to anticipated conditions in the used car market. All rental vehicles are depreciated on a straight-line basis. Depreciation for vehicles acquired under repurchase and guaranteed depreciation programs includes consideration of the contractual guaranteed residual values and the number of months between the original purchase date of the vehicle and the expected sale date of the vehicle back to the manufacturers. For 2006, 2005 and 2004, rental vehicles were depreciated at rates ranging from 7% to 34% per annum. As market conditions change, the Company adjusts its depreciation. Upon disposal of the vehicles, depreciation expense is also adjusted for any difference between the net proceeds from the sale and the remaining book value. Vehicle-related interest amounts are net of interest income of $6 million, $4 million and $4 million for 2006, 2005 and 2004, respectively. ADVERTISING EXPENSES Advertising costs are expensed in the period incurred. Advertising expenses, recorded within selling, general and administrative expense on the Company’s Consolidated Statements of Income, were approximately $107 million, $100 million and $97 million in 2006, 2005 and 2004, respectively. INCOME TAXES The Company’s income taxes are included in the consolidated federal tax return of ABGI for 2006, 2005 and 2004. In addition, the Company has filed consolidated and combined state income tax returns with ABGI in jurisdictions where required or permitted. The provision for income taxes is computed as if the Company filed its federal and state income tax returns on a stand-alone basis. The Company’s provision for income taxes is determined using the asset and liability method, under which deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are

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recorded as reductions to the Company’s provision for income taxes while increases to the valuation allowance result in additional provision. However, if the valuation allowance is adjusted in connection with an acquisition, such adjustment is recorded through goodwill rather than the provision for income taxes. The realization of the Company’s deferred tax assets, net of the valuation allowance, is primarily dependent on estimated future taxable income. A change in the Company’s estimate of future taxable income may require an addition or reduction to the valuation allowance. During 2006, the Company revised how it records the utilization of its net operating loss carryforwards by other entities within the ownership structure of the Company’s parent, ABGI. The Company determined it would be preferable to record the utilization of its net operating loss carryforwards as a transfer of assets among related parties reflected in the Company’s intercompany balance with ABGI. Previously, the Company reflected such utilization as a charge to its deferred income tax provision with a corresponding benefit recorded within its current income tax provision. The adoption of this change in accounting policy resulted in an approximately $101 million decrease to the Company’s deferred income tax provision with a corresponding increase to the Company’s current income tax provision for the year ended December 31, 2006. Such adoption did not affect the Company’s reported earnings or financial position. The following schedule presents the effect by financial statement line item of this change on prior years: As Originally Change in As Reported Policy Adjusted Consolidated Statement of Income for the Year Ended December 31, 2005 Current income tax provision $ (64) $ 109 $ 45 Deferred income tax provision 193 (109) 84 Consolidated Statement of Income for the Year Ended December 31, 2004 Current income tax provision (591) 593 2 Deferred income tax provision 738 (593) 145 Consolidated Statement of Cash Flows for the Year Ended December 31, 2005 Deferred income tax $ 193 $ (109) $ 84 Income taxes due from ABGI (109) 109 - Consolidated Statement of Cash Flows for the Year Ended December 31, 2004 Deferred income tax 738 (593) 145 Income taxes due from ABGI (593) 593 - CASH AND CASH EQUIVALENTS The Company considers highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. DERIVATIVE INSTRUMENTS The Company uses derivative instruments as part of its overall strategy to manage its exposure to market risks associated with fluctuations in foreign currency exchange rates, interest rates and gasoline costs. As a matter of policy, the Company does not use derivatives for trading or speculative purposes. All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated as hedging instruments are recognized currently in earnings in the Consolidated Statements of Income within the same line item as the hedged item (principally vehicle interest, net). The effective portion of changes in fair value of derivatives designated as cash flow hedging instruments is recorded as a component of other comprehensive income. The ineffective portion is recognized currently in earnings within the same line item as the hedged item, including vehicle interest, net or interest related to corporate debt, net based upon the nature of the hedged item. Amounts included in other comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings.

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PROPERTY AND EQUIPMENT

Property and equipment (including leasehold improvements) are recorded at cost, net of accumulated depreciation and amortization. Depreciation, recorded as a component of non-vehicle related depreciation and amortization in the Consolidated Statements of Income, is computed utilizing the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements, also recorded as a component of non-vehicle related depreciation and amortization, is computed utilizing the straight-line method over the estimated benefit period of the related assets, which may not exceed 20 years, or the lease term, if shorter. Useful lives are generally 30 years for buildings, three to seven years for capitalized software, three to seven years for furniture, fixtures and equipment and four to 15 years for buses and support vehicles. The Company capitalizes the costs of software developed for internal use in accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalization of software developed for internal use commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis, for three to seven years, when such software is substantially ready for use. The net carrying value of software developed or obtained for internal use was $50 million as of December 31, 2006 and 2005.

On March 30, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), which clarifies that conditional asset retirement obligations are within the scope of SFAS No. 143, “Accounting for Asset Retirement Obligations.” FIN 47 requires the Company to recognize a liability for the fair value of conditional asset retirement obligations if the fair value of the liability can be reasonably estimated. The Company adopted the provisions of FIN 47 in fourth quarter 2005, as required. Accordingly, the Company recorded a $14 million ($8 million after tax) non-cash charge to reflect the cumulative effect of accounting change during 2005 relating to the Company’s obligation to remove assets at certain leased properties.

IMPAIRMENT OF LONG-LIVED ASSETS

In connection with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company is required to assess goodwill and other indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company assesses goodwill for such impairment by comparing the carrying value of its reporting units to their fair values. Each of the Company’s reportable segments represents a reporting unit. The Company determines the fair value of its reporting units utilizing discounted cash flows and incorporates assumptions that it believes marketplace participants would utilize. When available and as appropriate, the Company uses comparative market multiples and other factors to corroborate the discounted cash flow results. Other indefinite-lived intangible assets are tested for impairment and written down to fair value, as required by SFAS No. 142.

The Company evaluates the recoverability of its other long-lived assets, including amortizing intangible assets, if circumstances indicate an impairment may have occurred, pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. Property and equipment is evaluated separately within each segment. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Company’s Consolidated Statements of Income.

The Company recorded no impairment of goodwill or indefinite-lived intangible assets or other long-lived assets during 2006, 2005 or 2004. PROGRAM CASH

Program cash primarily represents amounts specifically designated to purchase assets under vehicle programs and/or to repay the related debt.

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PUBLIC LIABILITY, PROPERTY DAMAGE AND OTHER INSURANCE LIABILITIES Public liability, property damage and other insurance liabilities on the Company’s Consolidated Balance Sheets include additional liability insurance, personal effects protection insurance, public liability, property damage and personal accident insurance claims for which the Company is self-insured. The Company estimates the required liability of such claims on an undiscounted basis utilizing an actuarial method that is based upon various assumptions which include, but are not limited to, the Company’s historical loss experience and projected loss development factors. The required liability is also subject to adjustment in the future based upon changes in claims experience, including changes in the number of incidents (frequency) and changes in the ultimate cost per incident (severity).

CHANGES IN ACCOUNTING POLICIES DURING 2006 Consideration of Misstatements. In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”), which provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The Company adopted the guidance of SAB No. 108 for the year ended December 31, 2006, which had no impact on the Company’s financial statements. Pension Plans. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The adoption of the provisions of SFAS No. 158 in fourth quarter 2006 resulted in a pre-tax charge of $6 million ($4 million, after tax) recorded within stockholder’s equity.

Stock-Based Compensation. On January 1, 2003, the Company adopted the fair value method of accounting for stock-based compensation of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and the prospective transition method of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Accordingly, the Company has recorded stock-based compensation expense for all employee stock awards that were granted or modified subsequent to December 31, 2002.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), which eliminates the alternative to measure stock-based compensation awards using the intrinsic value approach permitted by APB Opinion No. 25 and by SFAS No. 123. ABGI adopted SFAS No. 123R on January 1, 2006, as required. Because the Company was allocated stock-based compensation expense through its intercompany account with ABGI for all outstanding employee stock awards prior to ABGI’s adoption of SFAS No. 123R, the adoption of such standard by ABGI did not have a significant impact on the amount of stock-based compensation allocated to the Company by ABGI. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) which defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 157 on January 1, 2008, as required, and is currently evaluating the impact of such adoption on its financial statements. Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company will adopt the provisions of FIN 48 effective January 1, 2007, as required.

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3. Acquisitions

Assets acquired and liabilities assumed in business combinations were recorded on the Company’s Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Company’s Consolidated Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values will be recorded by the Company as further adjustments to the purchase price allocations. During 2006, the Company acquired 19 vehicle rental licensees for $20 million in cash, resulting in trademark intangible assets of $17 million. During 2005, the Company acquired 23 vehicle rental licensees for $206 million in cash, resulting in trademark intangible assets of $88 million and goodwill of $6 million, none of which is expected to be deductible for tax purposes. During 2004, the Company acquired 29 vehicle rental licensees for $60 million in cash, resulting in goodwill of $33 million, all of which is expected to be deductible for tax purposes, and trademark intangible assets of $13 million. These acquisitions, which relate primarily to the Company’s International Car Rental segment, were not significant individually or in the aggregate to the Company’s results of operations, financial position or cash flows.

4. Intangible Assets

Intangible assets consisted of: As of December 31, 2006 As of December 31, 2005

Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying

Amount Amortization Amount Amount Amortization Amount Amortized Intangible Assets Franchise agreements (a) $ 75 $ 16 $ 59 $ 76 $ 14 $ 62 Customer lists (b) 19 6 13 20 6 14 $ 94 $ 22 $ 72 $ 96 $ 20 $ 76 Unamortized Intangible Assets Goodwill $ 2,193 $ 2,188 Trademarks (c) $ 666 $ 654 ____________ (a) Primarily amortized over a period ranging from 2 to 40 years. (b) Primarily amortized over 20 years. (c) Comprised of various tradenames (including the Avis and Budget tradenames) that the Company has acquired and which

distinguish the Company’s consumer services. These tradenames are expected to generate future cash flows for an indefinite period of time.

The changes in the carrying amount of goodwill during 2006 are as follows:

Adjustments to Goodwill Balance at Acquired Balance at January 1, during December 31,

2006 2005 2006 Domestic Car Rental $ 1,354 $ 1(a) $ 1,355 International Car Rental 591 4(a) 595 Truck Rental 243 - 243 Total Company $ 2,188 $ 5 $ 2,193 ____________ (a) Primarily relates to tax adjustments on the acquisition of Budget licensees.

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Amortization expense relating to all intangible assets was as follows: Year Ended December 31, 2006 2005 2004 Franchise agreements $ 2 $ 2 $ 3 Customer lists 1 2 1 Total $ 3 $ 4 $ 4

Based on the Company’s amortizable intangible assets as of December 31, 2006, the Company expects related amortization expense to approximate $3 million for each of the five succeeding fiscal years.

5. Vehicle Rental Activities

The components of vehicles, net within assets under vehicle programs are as follows: As of December 31, 2006 2005 Rental vehicles $ 7,738 $ 8,247 Vehicles held for sale 304 165 8,042 8,412 Less: accumulated depreciation (993) (903) $ 7,049 $ 7,509 The components of vehicle depreciation and lease charges, net are summarized below: Year Ended December 31, 2006 2005 2004 Depreciation expense $ 1,362 $ 1,191 $ 941 Lease charges 54 69 58 Gain on sales of vehicles, net - (22) (11) $ 1,416 $ 1,238 $ 988 During 2006, vehicle interest, net on the accompanying Consolidated Statement of Income excludes $101 million of interest expense related to $1,875 million of fixed and floating rate borrowings of the Company. Such interest is recorded within interest related to corporate debt, net on the accompanying Consolidated Statement of Income.

6. Franchising Activities

Franchising revenues, which are recorded within other revenues on the accompanying Consolidated Statements of Income, amounted to $37 million, $39 million, and $43 million during 2006, 2005 and 2004, respectively. The number of Company-owned and franchised outlets in operation (excluding independent commissioned dealer locations for the Budget truck rental business and Avis and Budget locations operated under an arrangement with Avis Europe Holdings, Limited, an independent third party) is as follows:

As of December 31, 2006 2005 2004 Company-owned Avis brand 1,268 1,186 1,074 Budget brand 951 902 822 Franchised Avis brand 847 849 851 Budget brand 1,218 1,221 1,345 In connection with ongoing fees the Company receives from its franchisees pursuant to the franchise agreements, the Company is required to provide certain services, such as training, marketing and the operation of reservation systems.

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7. Restructuring Charges

During fourth quarter 2006, the Company committed to various strategic initiatives targeted principally at reducing costs, enhancing organizational efficiency and consolidating and rationalizing existing processes and facilities within its Budget Truck Rental and Domestic Car Rental operations. The more significant areas of cost reduction include the closure of the Budget Truck Rental headquarters and other facilities and reductions in staff. In connection with these initiatives, the Company recorded a restructuring charge of $8 million in 2006 with an additional $2 million to be recorded in 2007, for a total of $10 million, substantially all of which is anticipated to be paid in cash. The 2007 charge of $2 million will be incurred by the Company’s Truck Rental segment and represents various personnel related costs.

The initial recognition of the restructuring charge and the corresponding utilization from inception are summarized by category as follows: Personnel Facility Related (a) Related (b) Total Initial charge $ 4 $ 4 $ 8 Cash payments - (1) (1) Balance at December 31, 2006 $ 4 $ 3 $ 7

____________ (a) The initial charge primarily represents severance benefits resulting from reductions in staff. The Company formally

communicated the termination of employment to approximately 180 employees, representing a wide range of employee groups. As of December 31, 2006, the Company had terminated approximately 25 of these employees.

(b) The initial charge principally represents costs incurred in connection with facility closures and lease obligations resulting from the closure of the Truck Rental headquarters, consolidation of Truck Rental operations and the closure of other facilities within the Company’s Domestic Car Rental operations.

Total restructuring charges are recorded as follows: Liability as of Costs Cash December 31, Incurred Payments 2006 Truck Rental $ 6 $ (1) $ 5 Domestic Car Rental 2 - 2 $ 8 $ (1) $ 7

8. Income Taxes

The income tax provision consists of the following: Year Ended December 31, 2006 2005 2004 Current

Federal $ (3) $ - $ - State 9 3 (21) Foreign (4) 42 23 2 45 2

Deferred Federal 29 95 106 State 45 4 39 Foreign 29 (15) - 103 84 145

Provision for income taxes $ 105 $ 129 $ 147

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Pre-tax income for domestic and foreign operations consists of the following: Year Ended December 31, 2006 2005 2004 Domestic $ 122 $ 280 $ 313 Foreign 68 73 71 Pre-tax income $ 190 $ 353 $ 384 Current and non-current deferred income tax assets and liabilities are comprised of the following: As of December 31, 2006 2005 Current deferred income tax assets: Net operating loss carryforwards $ - $ 95 State net operating loss carryforwards - 2 Accrued liabilities and deferred income 37 33 Provision for doubtful accounts 6 1 Acquisition and integration-related liabilities 4 42 Other - 5 Current deferred income tax assets 47 178

Current deferred income tax liabilities: Prepaid expenses 49 39 Current deferred income tax liabilities 49 39

Current net deferred income tax (liability) asset $ (2) $ 139

Non-current deferred income tax assets: Net operating loss carryforwards $ 30 $ 5 Foreign net operating loss carryforwards 20 24 State net operating loss carryforwards 113 18 Alternate minimum tax credit carryforward 102 8 Acquisition and integration-related liabilities 23 - Accrued liabilities and deferred income 36 69 Public liability, property damage and other insurance liabilities 103 115 Other - 1 Valuation allowance (*) (81) (9) Non-current deferred income tax assets 346 231

Non-current deferred income tax liabilities: Acquisition and integration-related liabilities - 3 Depreciation and amortization 173 160

Non-current deferred income tax liabilities 173 163 Non-current net deferred income tax asset $ 173 $ 68 ____________ (*) The valuation allowance of $81 million at December 31, 2006 relates to state net operating loss carryforwards and certain state

deferred tax assets of $75 million and $6 million, respectively. The valuation allowance will be reduced when and if the Company determines that the related deferred income tax assets are more likely than not to be realized. If determined to be realizable, approximately $4 million of the valuation allowance for state net operating loss carryforwards would reduce goodwill.

Net deferred income tax liabilities related to vehicle programs are comprised of the following: As of December 31, 2006 2005 Vehicle depreciation $ 1,205 $ 1,130 Other comprehensive income 1 9 Net deferred income tax liability under vehicle programs $ 1,206 $ 1,139

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As of December 31, 2006, the Company had federal net operating loss carryforwards of approximately $87 million, which primarily expire in 2024. No provision has been made for U.S. federal deferred income taxes on approximately $273 million of accumulated and undistributed earnings of foreign subsidiaries at December 31, 2006 since it is present intention of management to reinvest the undistributed earnings indefinitely in those foreign operations. The determination of the amount of unrecognized U.S. federal deferred income tax liability for unremitted earnings is not practicable.

The Company’s effective income tax rate for continuing operations differs from the U.S. federal statutory rate as follows: As of December 31, 2006 2005 2004 Federal statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefits 16.4 2.0 3.1 Change in valuation allowance 2.2 (0.7) - Taxes on foreign operations at rates different than U.S. federal statutory rates 0.4 0.5 (0.5) Other 1.2 (0.3) 0.7 55.2% 36.5 % 38.3%

In 2006, the separation caused a restructuring of the consolidated income tax group which resulted in approximately $103 million of ABGI’s state net operating loss carryforwards and alternative minimum tax credit carryforwards (net of $68 million valuation allowance) being contributed to the Company. In addition, the Company incurred charges related to (1) the carrying value of its deferred income taxes for an increase to the Company’s state effective tax rate, and (2) the increase of the valuation allowance related to state deferred tax assets. In 2006, approximately $101 million of the Company’s federal net operating loss carryforwards were utilized by ABGI which was recorded through the intercompany balance with ABGI. The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5, “Accounting for Contingencies.” The Company and ABGI’s income tax returns are periodically examined by various tax authorities. The Company and ABGI are currently under audit by several tax authorities. In connection with these and future examinations, certain tax authorities, including the Internal Revenue Service, may raise issues and impose additional assessments. The Company and ABGI regularly evaluate the likelihood of additional assessments resulting from these examinations and establish reserves, through the provision for income taxes, for potential amounts that may result therefrom. Reserves are adjusted as information becomes available or when an event requiring a change to the reserve occurs. The resolution of tax matters could have a material impact on the Company’s effective tax rate and results of operations.

9. Property and Equipment, net

Property and equipment, net consisted of: As of December 31, 2006 (a) 2005 Land $ 50 $ 48 Buildings and leasehold improvements 337 264 Capitalized software 238 110 Furniture, fixtures and equipment 138 105 Buses and support vehicles 68 74 Projects in process 89 86 920 687 Less: Accumulated depreciation and amortization (434) (249) $ 486 $ 438

____________ (a) The increase in property and equipment, net is primarily related to the transfer of assets from ABGI of $51 million and

capital expenditures of $83 million during 2006.

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Depreciation and amortization expense relating to property and equipment during 2006, 2005 and 2004 was $83 million, $76 million and $69 million, respectively (including $29 million, $20 million and $16 million, respectively, of amortization expense relating to capitalized computer software).

10. Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities consisted of: As of December 31, 2006 2005 Accounts payable $ 207 $ 233 Accrued payroll and related 144 151 Public liability and property damage insurance liabilities (a) 116 125 Acquisition related 85 103 Accrued legal and professional 7 120 Other 96 97 $ 655 $ 829

____________ (a) The non-current liability related to public liability and property damage insurance was $260 million and $297 million at

December 31, 2006 and 2005, respectively. 11. Long-term Debt and Borrowing Arrangements

Long-term debt consisted of: Maturity As of December 31, Date 2006 2005

Floating rate term loan (a) April 2012 $ 838 $ - Floating rate notes (a) May 2014 250 - 7⅝% notes (a) May 2014 375 - 7¾% notes (a) May 2016 375 -

Total long-term debt 1,838 - Less: Current portion 25 1 Long-term debt $ 1,813 $ 1 ____________ (a) In connection with the execution of ABGI’s separation plan, the Company borrowed $1,875 million in April 2006, which

consisted of (i) $1.0 billion of unsecured fixed and floating rate notes and (ii) an $875 million secured floating rate term loan under a credit facility.

Floating Rate Term Loan The Company’s floating rate term loan was entered into in April 2006, has a six year term and bears interest at three month LIBOR plus 125 basis points. Quarterly installment payments are required for the first five and three quarter years with the remaining amount repayable in full at the end of the term. During 2006, the Company repaid $37 million of outstanding principal under the floating rate term loan. Floating Rate Notes The Company’s floating rate notes were issued in April 2006 at 100% of their face value for aggregate proceeds of $250 million. The interest rate on these notes is equal to three month LIBOR plus 250 basis points. The Company has the right to redeem these notes in whole or in part at any time prior to May 15, 2008 at the applicable make-whole redemption price and, in whole or in part, at any time on or after May 15, 2008, at the applicable scheduled redemption price plus in each case, accrued and unpaid interest through the redemption date. These notes are senior unsecured obligations and rank equally in right of payment with all the Company’s existing and future senior indebtedness.

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7⅝% and7¾% Notes The Company’s 7⅝ % and 7¾ % notes were issued in April 2006 at 100% of their face value for aggregate proceeds of $750 million. The Company has the right to redeem the 7⅝ % and 7¾ % notes in whole or in part at any time prior to May 15, 2010 and May 15, 2011, respectively, at the applicable make-whole redemption price and, in whole or in part, at any time on or after May 15, 2010 and May 15, 2011, respectively, at the applicable scheduled redemption price plus in each case, accrued and unpaid interest through the redemption date. These notes are senior unsecured obligations and rank equally in right of payment with all the Company’s existing and future senior indebtedness. DEBT MATURITIES The following table provides contractual maturities of the Company’s corporate debt at December 31, 2006:

Year Amount 2007 $ 25 2008 9 2009 9 2010 9 2011 9 Thereafter 1,777 $ 1,838 COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS At December 31, 2006, the committed credit facilities available to the Company were as follows: Total Outstanding Letters of Available Capacity Borrowings Credit Issued Capacity $1.5 billion Revolving credit facility (a) $ 1,500 $ - $ 284 $ 1,216 ____________ (a) This secured revolving credit facility was entered into by the Company in April 2006, has a five year term and currently bears

interest at one month LIBOR plus 125 basis points.

DEBT COVENANTS

The Company’s debt agreements contain restrictive covenants, including restrictions on dividends, the incurrence of indebtedness by the Company and certain of its subsidiaries, mergers, liquidations, and sale and leaseback transactions. The credit facility also requires the maintenance of certain financial ratios. As of December 31, 2006, the Company is not aware of any instances of non-compliance with such financial or restrictive covenants.

12. Debt Under Vehicle Programs and Borrowing Arrangements

Debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding (AESOP), LLC (“Avis Budget Rental Car Funding”)) consisted of: As of December 31, 2006 2005 Debt due to Avis Budget Rental Car Funding $ 4,511 $ 6,932 Budget Truck Financing:

HFS Truck Funding program - 149 Budget Truck Funding program 135 - Capital leases 257 370

Other 367 433 $ 5,270 $ 7,884

Avis Budget Rental Car Funding. Avis Budget Rental Car Funding, an unconsolidated bankruptcy remote qualifying special purpose limited liability company, issues private placement notes and uses the proceeds from such issuances to make loans to a wholly-owned subsidiary of the Company, AESOP Leasing LP (“AESOP Leasing”) on a continuing basis. AESOP Leasing is required to use these proceeds to acquire or finance the acquisition of vehicles used in the

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Company’s rental car operations. As a result, AESOP Leasing’s obligation to Avis Budget Rental Car Funding is reflected as related party debt on the Company’s Consolidated Balance Sheets as of December 31, 2006 and 2005. The Company also recorded an asset within assets under vehicle programs on its Consolidated Balance Sheets at December 31, 2006 and 2005, which represents the equity issued to the Company by Avis Budget Rental Car Funding. The vehicles purchased by AESOP Leasing remain on the Company’s Consolidated Balance Sheets as AESOP Leasing is consolidated by the Company. Such vehicles and related assets, which approximate $6.6 billion at December 31, 2006, collateralize the debt issued by Avis Budget Rental Car Funding and are not available to pay the obligations of the Company.

The business activities of Avis Budget Rental Car Funding are limited primarily to issuing indebtedness and using the proceeds thereof to make loans to AESOP Leasing for the purpose of acquiring or financing the acquisition of vehicles to be leased to the Company’s rental car subsidiary and pledging its assets to secure the indebtedness. Because Avis Budget Rental Car Funding is not consolidated by the Company, its results of operations and cash flows are not reflected within the Company’s Consolidated Financial Statements. Borrowings under the Avis Budget Rental Car Funding program primarily represent floating rate term notes with a weighted average interest rate of 5%, 4% and 3% for 2006, 2005 and 2004, respectively. Truck financing. Budget Truck financing consists of debt outstanding under the HFS Truck Funding Program, the Budget Truck Funding program and capital leases. The Budget Truck Funding program is a debt facility established by the Company to finance the acquisition of the Budget truck rental fleet. The borrowings under the Budget Truck Funding program are collateralized by $136 million of corresponding assets and are floating rate term loans with a weighted average interest rate of 5% in 2006. The HFS Truck Funding program’s floating rate term notes had a weighted average interest rate of 4% and 2% in 2005 and 2004, respectively. The Company terminated the HFS Truck Funding program in November 2006, at which time remaining obligations thereunder were repaid. The Company has also obtained a portion of its truck rental fleet under capital lease arrangements for which there are corresponding gross assets of $381 million and $434 million with accumulated amortization of $129 million and $70 million classified within vehicles, net on the Company’s Consolidated Balance Sheets as of December 31, 2006 and 2005, respectively. Interest paid as part of capital lease obligations was $20 million and $14 million during 2006 and 2005, respectively.

Other. Borrowings under the Company’s other vehicle rental programs represent amounts issued under financing facilities that provide for the issuance of notes to support the acquisition of vehicles used in the Company’s international vehicle rental operations. The debt issued is collateralized by $726 million of vehicles and related assets and primarily represents floating rate bank loans and commercial paper for which the weighted average interest rate was 5%, 4% and 3% for 2006, 2005 and 2004, respectively. The following table provides the contractual maturities of the Company’s debt under vehicle programs (including related party debt due to Avis Budget Rental Car Funding) at December 31, 2006:

Vehicle-Backed Capital Debt Leases Total

2007 $ 796 $ 95 $ 891 2008 1,728 122 1,850 2009 550 40 590 2010 1,036 - 1,036 2011 600 - 600 Thereafter 303 - 303 $ 5,013 $ 257 $ 5,270

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COMMITTED CREDIT FACILITIES AND AVAILABLE FUNDING ARRANGEMENTS

As of December 31, 2006, available funding under the Company’s vehicle programs (including related party debt due to Avis Budget Rental Car Funding) consisted of: Total Outstanding Available Capacity (a) Borrowings Capacity Debt due to Avis Budget Rental Car Funding $ 6,286 $ 4,511 $ 1,775 Budget Truck financing: Budget Truck Funding program 200 135 65 Capital leases 257 257 - Other 1,104 367 737 $ 7,847 $ 5,270 $ 2,577 ____________ (a) Capacity is subject to maintaining sufficient assets to collateralize debt. DEBT COVENANTS

Debt agreements under the Company’s vehicle-backed funding programs contain restrictive covenants, including restrictions on dividends paid to the Company by certain of its subsidiaries and indebtedness of material subsidiaries, mergers, limitations on liens, liquidations, and sale and leaseback transactions, and also require the maintenance of certain financial ratios. As of December 31, 2006, the Company is not aware of any instances of non-compliance with such financial or restrictive covenants.

13. Commitments and Contingencies

Lease Commitments

The Company is committed to making rental payments under non-cancelable operating leases covering various facilities and equipment. Future minimum lease payments required under non-cancelable operating leases as of December 31, 2006 are as follows: Year Amount 2007 $ 393 2008 302 2009 208 2010 147 2011 102 Thereafter 635 $ 1,787 ______________

(*) Includes payments of $273 million, $206 million, $133 million, $94 million, $63 million and $365 million relating to airport concession fees in 2007, 2008, 2009, 2010, 2011 and thereafter, respectively.

Other than those within the Company’s vehicle rental program, for which the future minimum lease payments have been reflected in Note 12—Debt Under Vehicle Programs and Borrowing Arrangements, commitments under capital leases are not significant. During 2006, 2005 and 2004, the Company incurred total rental expense of $538 million, $490 million and $450 million, respectively, inclusive of contingent rental expense of $142 million, $138 million and $97 million in 2006, 2005 and 2004, respectively, principally based on car rental volume. Included within the Company’s total rental expense for 2006, 2005 and 2004 are concession fees paid by the Company in connection with agreements with various airport authorities that allow the Company to conduct its car rental operations on-site. In general, concession fees for airport locations are based on a percentage of total commissionable revenue (as determined by each airport authority), subject to minimum annual guaranteed amounts. Such fees, which amounted to $235 million, $211 million and $215 million during 2006, 2005 and 2004, respectively, are included within operating, net on the Company’s Consolidated Statements of Income.

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Commitments to Purchase Vehicles

The Company maintains agreements with vehicle manufacturers, which require the Company to purchase approximately $8.0 billion of vehicles from these manufacturers over the next two years (approximately $4.7 billion and $3.3 billion during 2007 and 2008, respectively). These commitments are subject to the vehicle manufacturers’ satisfying their obligations under the repurchase and guaranteed depreciation agreements. The Company purchases the majority of its rental vehicles from a small number of vehicle manufacturers and its primary suppliers for the Avis and Budget brands are General Motors Corporation and Ford Motor Company, respectively. The purchase of such vehicles is financed through the issuance of debt under vehicle programs in addition to cash received upon the sale of vehicles primarily under repurchase and guaranteed depreciation programs.

Contingencies

The Company is also involved in claims, legal proceedings and governmental inquiries related to its vehicle rental operations, including contract disputes, business practices, intellectual property, environmental issues and other commercial, employment and tax matters, including breach of contract claims by licensees. The Company believes that it has adequately accrued for such matters as appropriate or, for matters not requiring accrual, believes that they will not have a material adverse effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable resolutions could occur, which could have a material adverse effect on the Company’s results of operations or cash flows in a particular reporting period. Standard Guarantees/Indemnifications

In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for breaches of representations and warranties. In addition, many of these parties are also indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. Such guarantees or indemnifications are granted under various agreements, including those governing (i) purchases, sales or outsourcing of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities and use of derivatives and (v) issuances of debt. The guarantees or indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in credit facility arrangements and derivative contracts, and (v) underwriters in debt issuances. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these guarantees, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees as the triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates any potential payments to be made.

14. Stockholder’s Equity

Accumulated Other Comprehensive Income

The after-tax components of accumulated other comprehensive income are as follows: Unrealized Minimum Accumulated Currency Gains(Losses) Pension Other Translation on Cash Flow Liability Comprehensive Adjustments (*) Hedges Adjustment Income(Loss) Balance, January 1, 2004 $ 46 $ (5) $ (5) $ 36 Current period change 17 19 (1) 35 Balance, December 31, 2004 63 14 (6) 71 Current period change (9) 27 (20) (2) Balance, December 31, 2005 54 41 (26) 69 Current period change 16 (11) (4) 1

Balance, December 31, 2006 $ 70 $ 30 $ (30) $ 70

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____________ (*) Assets and liabilities of foreign subsidiaries having non-U.S.-dollar functional currencies are translated at exchange rates at the

Consolidated Balance Sheet dates. Revenues and expenses are translated at average exchange rates during the periods presented. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, are included in accumulated other comprehensive income. Gains or losses resulting from foreign currency transactions are included in the Consolidated Statements of Income.

All components of accumulated other comprehensive income are net of tax except currency translation adjustments, which exclude income taxes related to indefinite investments in foreign subsidiaries. Capital contributions from ABGI During 2006, ABGI contributed certain assets with a net book value of $15 million to the Company. Additionally during 2006, the Company recorded a non-cash capital contribution of $47 million related to Realogy, Wyndham and Travelport disposition. During 2005 and 2004, ABGI forgave $3 million and $907 million, respectively, of amounts the Company owed to ABGI or its affiliates. Such amounts are reflected as increases to additional paid-in-capital within the accompanying Consolidated Statements of Stockholder’s Equity. Forgiveness of amounts due from Avis Budget Group, Inc. In accordance with ABGI’s execution of the separation plan, the Company eliminated $811 million of intercompany receivables from ABGI, which is reflected as a decrease to additional paid-in-capital within the accompanying Consolidated Statements of Stockholder’s Equity.

15. Stock-Based Compensation

As of December 31, 2006, all employee stock awards (stock options, stock appreciation rights, restricted shares and restricted stock units (“RSUs”)) were granted by ABGI. Beginning in 2003, ABGI changed the method by which it provides stock-based compensation to its employees by significantly reducing the number of stock options granted and instead, issuing RSUs as a form of compensation and in 2006 began to issue stock settled stock appreciation rights (“SARs”) to certain executives.

Stock Options Following the spin-offs of Realogy and Wyndham by Cendant, all previously outstanding time and performance vesting and time vesting stock options vested and converted into stock options of Avis Budget, Realogy and Wyndham. Although no stock options were granted during 2006, ABGI may grant stock options that vest based on performance and/or time vesting criteria. The predetermined performance criteria determine the number of options that will ultimately vest and are based on growth in earnings before taxes and certain revenue metrics over varying periods of three to four years.

The annual activity of ABGI’s common stock option plans under which the Company’s employees were granted options consisted of (in thousands of shares):

2006 2005 2004 Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Options Price(f) Options Price(f) Options Price(f) Balance at beginning of year 600 $ 28.39 560 $ 29.67 760 $ 27.75 Granted at fair market value (a) - - 1 30.02 14 34.65 Granted in connection with PHH spin-off (b) - - 24 (*) - - Exercised (c) (7) 24.22 (32) 21.27 (179) 21.12 Forfeited (143) 40.99 (11) 32.83 (25) 35.31 Transferred (d) 247 24.33 58 25.09 (10) 29.17 Balance at end of year (e) 697 24.43 600 28.39 560 29.67

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____________ (*) Not meaningful. (a) Reflects the maximum number of options assuming achievement of all performance and time vesting criteria. (b) As a result of the ABGI spin-off of PHH, ABGI granted incremental options and reduced the exercise price of each stock option. (c) Stock options exercised during 2006, 2005 and 2004 had insignificant intrinsic value. (d) The 2006 amount relates to employees who were transferred to the Company as a result of the separation. (e) As of December 31, 2006, outstanding “in-the-money” stock options granted to the Company’s employees had insignificant

intrinsic value. Aggregate unrecognized compensation expense related to outstanding stock options was zero as of December 31, 2006.

(f) As a result of the spin-offs of Realogy and Wyndham on July 31, 2006, the exercise price of each option was adjusted downward by a proportionate value. Such amounts were then revised to reflect the one-for-ten reverse stock split, which became effective on September 5, 2006.

The table below summarizes information regarding ABGI’s outstanding and exercisable stock options issued to the Company’s employees as of December 31, 2006 (in thousands of shares): Outstanding and Exercisable Options(*) Weighted Average Weighted Number Remaining Average Range of of Contractual Exercise Exercise Prices Options Life Price Less than $20.00 169 5.3 $ 17.82 $20.01 to $25.00 106 3.3 20.79 $25.01 to $30.00 335 3.7 26.93 $30.01 to $35.00 87 2.9 32.10 $35.01 and above - - -

697 3.9 24.43 ____________ (*) All outstanding stock options vested in connection with the completion of the separation.

The weighted-average grant-date fair value of ABGI common stock options granted during 2005 and 2004 was $5.80 and $6.90, respectively. The fair values of these stock options are estimated on the dates of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for Cendant common stock options granted in 2005 and 2004:

2005 2004

Dividend yield 1.7% 1.5% Expected volatility 30.0% 30.0% Risk-free interest rate 3.9% 4.0% Expected holding period (years) 5.5 5.5

Restricted Stock Units

RSUs currently granted by ABGI entitle the employee to receive one share of Avis Budget common stock upon vesting, which occurs ratably over a four-year period for the majority of currently outstanding RSUs. ABGI also employs performance and time vesting criteria for RSU grants made to certain of the Company’s executives. The predetermined performance criteria determine the number of RSUs that will ultimately vest and are based on growth in earnings before taxes and certain revenue metrics over varying periods of three to four years. The number of performance-based RSUs that will ultimately vest may range from 0% to 100% of the target award. The annual activity of ABGI’s RSU plan under which the Company’s employees were granted RSUs consisted of (in thousands of shares):

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2006 2005 2004 Number of Number of Number of RSUs(*) RSUs(*) RSUs(*)

Balance at beginning of year 270 150 47 Granted at fair market value (a) 1,170 146 116 Granted in connection with PHH spin-off (b) - - - Vested (c) (81) (73) (12) Cancelled (c) (453) (13) (3)

Transferred (d) 868 60 2 Balance at end of year (e) 1,774 270 150

____________ (*) Weighted average grant date prices are not meaningful due to the impact of the separation on the weighted average grant price of

RSUs. The weighted average grant price of RSUs granted subsequent to the spin-offs of Realogy and Wyndham and those outstanding at December 31, 2006 is $24.40.

(a) Reflects the maximum number of RSUs assuming achievement of all performance and time vesting criteria. (b) As a result of the spin-off of PHH, the closing price of Cendant common stock was adjusted downward on January 31, 2005. In

order to provide an equitable adjustment to holders of its RSUs, ABGI granted incremental RSUs to achieve a balance of 1.0477 RSUs outstanding subsequent to the spin-off for each RSU outstanding prior to the spin-off.

(c) As a result of the separation, approximately 0.2 million RSUs outstanding and granted by ABGI to the Company’s employees were cancelled. Also as a result of the separation, 0.1 million RSUs granted by ABGI to the Company’s employees converted into shares of Avis Budget common stock, Realogy common stock and Wyndham common stock.

(d) The 2006 amount relates to employees who were transferred to the Company as a result of the separation. (e) As of December 31, 2006, outstanding RSUs granted to the Company’s employees had aggregate intrinsic value of $38 million

and unrecognized compensation expense of $37 million, which will be recognized over the remaining vesting period of the respective award.

Stock Appreciation Rights

SARs are settled in ABGI stock, have a seven-year term, and vest ratably over a four-year period or after three years, with no graded vesting prior thereto. ABGI’s policy is to grant SARs with exercise prices at then-current fair market value. At December 31, 2006, there were approximately 0.5 million outstanding SARs granted to the Company’s employees with a weighted average grant-date fair value of $9.05. The fair value of these SARs is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for SARs granted during 2006: dividend yield-0%; expected volatility-32.9%; risk-free interest rate-4.9% and holding period-4.9 years. Compensation Expense The Company is allocated compensation expense for all outstanding employee stock awards through its intercompany account with ABGI on a basis consistent with the related vesting of the underlying award. ABGI’s policy is to record compensation expense related to the issuance of stock options and SARs to its employees on a straight-line basis over the vesting period of the award and based on the estimated number of options and SARs ABGI believes it will ultimately provide. ABGI records amortization expense of the deferred compensation related to RSUs over the remaining vesting periods of the respective RSUs on a straight-line basis and based on the estimated performance goals ABGI believes it will ultimately achieve. Currently, all stock-based compensation expense allocated to the Company associated with time and performance based awards is predicated on achievement of established performance targets. The Company recorded pretax stock-based compensation expense of $27 million, $6 million and $4 million ($17 million, $4 million and $2 million, after tax) during 2006, 2005 and 2004, respectively, related to employee stock awards that were granted or modified by ABGI. The expense recorded in 2006 includes a pretax charge of $17 million primarily related to the accelerated vesting of previously outstanding RSUs and equitable adjustments related to previously outstanding stock options, as a result of the separation of Cendant in third quarter 2006. Such pretax stock-based compensation expense is recorded within selling, general and administrative expenses on the accompanying Consolidated Statements of Income except amounts incurred in connection with the 2006 accelerated vesting of RSUs and stock options related to the separation (which are recorded within the separation costs line item).

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Presented below is the effect on net income for 2004 had compensation expense been recognized by ABGI and allocated to the Company for stock options that were granted prior to January 1, 2003. Reported net income $ 237 Add back: Stock-based employee compensation expense included in reported net income, net of tax 2 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (3) Pro forma net income $ 236

As of January 1, 2005, there were no outstanding employee stock awards for which stock-based compensation expense is not reflected within reported net income; accordingly, pro forma information is not presented subsequent to December 31, 2004.

16. Employee Benefit Plans

Defined Contribution Savings Plans The Company sponsors several defined contribution savings plans that provide certain eligible employees of the Company an opportunity to accumulate funds for retirement. The Company matches the contributions of participating employees on the basis specified in the plans. The Company’s cost for the matching contributions to these plans was $13 million, $6 million and $8 million for 2006, 2005 and 2004, respectively. Defined Benefit Pension Plans The Company sponsors domestic non-contributory defined benefit pension plans covering certain eligible employees and contributory defined benefit pension plans in certain foreign subsidiaries with participation in the plans at the employees’ option. Under both the domestic and foreign plans, benefits are based on an employee’s years of credited service and a percentage of final average compensation. However, the majority of such plans are frozen and no longer accruing benefits. As discussed in Note 2-Summary of Significant Accounting Policies, the Company adopted SFAS No. 158 as of December 31, 2006. As a result of the adoption of the provisions of SFAS No. 158, the Company recorded a pre-tax charge of $6 million ($4 million, after tax) within stockholder’s equity and a $6 million reduction in pension assets. The components of net periodic pension cost are as follows: For the Year Ended December 31, 2006 2005 2004 Service cost $ 2 $ 2 $ -

Interest cost 13 9 5 Expected return on plan assets (14) (11) (7)

Amortization of unrecognized amounts 5 4 2 Net periodic benefit cost $ 6 $ 4 $ - The Company uses a measurement date of December 31 for its pension plans. The funded status of the Company’s defined benefit pension plans as of December 31, 2006 and 2005 was as follows: Change in Benefit Obligation 2006 2005 Benefit obligation at end of prior year $ 176 $ 160 Service cost 2 2

Interest cost 11 9 Plan amendments 1 - Actuarial loss 10 11

Net benefits paid (7) (6) Benefit obligation at end of current year 193 176

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Change in Plan Assets

Fair value of assets at end of prior year 144 139 Actual return on plan assets 13 6 Employer contributions 6 5 Net benefits paid (7) (6) Fair value of assets at end of current year $ 156 $ 144

Funded status at end of year $ (37) $ (32) Unrecognized prior service cost 4 Unrecognized net transition obligation (a) (2) Unrecognized actuarial loss 46 Prepaid pension cost 16 Additional liability (a) (45) Net amounts recognized in the consolidated balance sheets $ (29) Amounts recognized in the consolidated balance sheets: Prepaid pension cost $ - $ 16 Other assets - 4 Pension liabilities (37) (8) Accumulated other comprehensive loss - (41) Net amounts recognized in the consolidated balance sheets $ (37) $ (29) ____________ (a) Disclosure is not applicable as a result of SFAS No. 158. The following assumptions, calculated on a weighted-average basis, were used to determine pension costs for the principal plans in which the Company’s employees participated: For the Year Ended December 31, 2006 2005 2004 Discount rate: Net periodic benefit cost 5.50% 5.75% 6.00%

Benefit obligation 5.75% 5.50% 6.00% Long-term rate of return on plan assets 8.25% 8.25% 8.50%

To select a discount rate for its defined benefit pension plans, the Company uses a modeling process that involves matching the expected cash outflows of such plan, to a yield curve constructed from a portfolio of AA rated fixed- income debt instruments. The Company uses the average yield of this hypothetical portfolio as a discount rate benchmark. The Company’s expected rate of return on plan assets of 8.25% is a long term rate based on historic plan asset returns over varying long term periods combined with current market conditions and broad asset mix considerations. The expected rate of return is a long term assumption and generally does not change annually.

As of December 31, 2006 substantially all of the Company’s defined benefit pension plans had a projected benefit obligation in excess of the fair value of plan assets. The Company expects to contribute approximately $8 million to these plans in 2007. The Company’s pension plan assets were $156 million and $144 million as of December 31, 2006 and 2005, respectively. The Company’s plan assets are managed by independent investment advisors with the objective of maximizing returns with a prudent level of risk. The Company’s plan assets, which consist principally of equity and fixed income securities of U.S. and foreign issuers, were as follows at December 31, 2006: Asset Category 2006 Equity 62% Fixed income 35% Real Estate 3%

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The Company estimates that future benefit payments from plan assets will be $8 million, $8 million, $8 million, $9 million, $9 million and $54 million for 2007, 2008, 2009, 2010, 2011 and 2012 to 2016, respectively.

17. Financial Instruments

Risk Management

Following is a description of the Company’s risk management policies.

Foreign Currency Risk. The Company uses foreign currency forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and forecasted royalties, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated acquisitions. The Company primarily hedges its foreign currency exposure to the British pound, Canadian dollar, Australian dollar and New Zealand dollar. The majority of forward contracts utilized by the Company do not qualify for hedge accounting treatment under SFAS No. 133. The fluctuations in the value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. Forward contracts that are used to hedge certain forecasted third party receipts and disbursements up to 12 months are designated and do qualify as cash flow hedges. The amount of gains or losses reclassified from other comprehensive income to earnings resulting from ineffectiveness or from excluding a component of the forward contracts’ gain or loss from the effectiveness calculation for cash flow hedges during 2006, 2005 and 2004 was not material, nor is the amount of gains or losses the Company expects to reclassify from other comprehensive income to earnings over the next 12 months.

The Company enters into foreign currency forward contracts to manage the Company’s exposure to changes in foreign currency exchange rates associated with future earnings of foreign subsidiaries and allocates gains or losses to the Company. The allocated amounts were insignificant during 2006, 2005 and 2004.

Interest Rate Risk. The Company’s vehicle-backed debt is exposed to interest rate fluctuations. The Company’s hedging strategy is to use derivative financial instruments, principally interest rate swaps and caps, to create an appropriate mix of fixed and floating rate debt. The Company uses various hedging strategies including interest rate swaps designated as cash flow hedges to create an appropriate mix of fixed and floating rate assets and liabilities. In connection with such cash flow hedges, the Company recorded a net loss of $6 million during 2006 to other comprehensive income. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges, which had maturities ranging from April 2007 to July 2012. In connection with such cash flow hedges, the Company recorded net gains (losses) of $(5) million, $27 million and $27 million during 2006, 2005 and 2004, respectively, to other comprehensive income. The after-tax amount of gains or losses reclassified from accumulated other comprehensive income (loss) to earnings resulting from ineffectiveness or from excluding a component of the derivatives’ gain or loss from the effectiveness calculation for cash flow hedges for 2006 and 2005 was not material to the Company’s results of operations. In 2004, the Company terminated certain derivatives associated with its vehicle-backed debt and reclassified $12 million of gains ($8 million, net of tax) from accumulated other comprehensive income to income. The Company estimates that $32 million of pre tax gains deferred in accumulated other comprehensive income will be recognized in earnings in 2007, which is expected to be offset in the Company’s results of operations by the impact of the hedged items. In 2006 and 2005, the Company recorded a gain of $5 million and $1 million, respectively, related to freestanding derivatives. During 2004, such freestanding derivatives had a nominal impact on the Company’s results of operations. Commodity Risk. The Company is also exposed to changes in commodity prices, which consist primarily of unleaded gasoline. In fourth quarter 2006, the Company purchased a derivative commodity instrument to manage the risk of changes in unleaded gasoline prices. This instrument is designated as a freestanding derivative and had a nominal impact on the Company’s results of operations in 2006. Credit Risk and Exposure. The Company is exposed to counterparty credit risks in the event of nonperformance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral in certain instances in which financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the

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amount for which it is at risk with each counterparty to such contracts, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties. During 2006, the Company instituted a change in the manner in which the Company return certain vehicles to manufacturers under repurchase and guaranteed depreciation agreements, which reduced the duration between the sale of a vehicle and the receipt of related cash.

There were no significant concentrations of credit risk with any individual counterparties or groups of counterparties at December 31, 2006 or 2005 other than (i) risks related to the Company’s repurchase and guaranteed depreciation agreements with General Motors Corporation and Ford Motor Company with respect to program cars that were sold and returned to the car manufacturers but for which the Company has not yet received payment (see Note 2—Summary of Significant Accounting Policies). Concentrations of credit risk associated with trade receivables are considered minimal due to the Company’s diverse customer base. Bad debts have been minimal historically. The Company does not normally require collateral or other security to support credit sales.

Fair Value

The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The carrying amounts of cash and cash equivalents, accounts receivable, program cash and accounts payable and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The Company believes that it is not practicable to estimate the current fair value of the amount due to ABGI Corporation and affiliates, net, because of the related party nature of the transactions (see Note 18—Related Party Transactions). The carrying amounts and estimated fair values of all other financial instruments at December 31, are as follows:

2006 2005 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value

Debt Current portion of long-term debt $ 25 $ 25 $ 1 $ 1 Long-term debt 1,813 1,775 - - Debt under vehicle programs Vehicle-backed debt due to Avis Budget Rental Car Funding 4,511 4,505 6,932 6,906 Vehicle-backed debt 744 739 931 931 Interest rate swaps and other derivatives (*) (15) (15) (21) (21)

Derivatives (*) (7) (7) 2 2 ____________ (*) Derivative instruments in gain (loss) positions.

18. Related Party Transactions

As a subsidiary of ABGI, the Company is involved in various relationships with ABGI and its other former subsidiaries. Following is a description of the Company’s transactions with ABGI and other related parties. Transactions with ABGI and affiliates The Company is allocated general corporate overhead expenses from ABGI for corporate-related functions based on a percentage of the Company’s forecasted revenues. General corporate overhead expense allocations include executive management, tax, insurance, accounting, legal and treasury services, purchasing, facilities, human resources, certain employee benefits, information technology, telecommunications, call centers and real estate usage. During 2006, 2005 and 2004, the Company was allocated $51 million, $56 million and $51 million, respectively, of general corporate overhead expenses from ABGI, which are included within the general and administrative expenses line item on the accompanying Consolidated Statements of Income.

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ABGI also incurs certain expenses on behalf of the Company. These expenses, which directly benefit the Company, are allocated to the Company in accordance with various intercompany agreements, which are based upon factors such as square footage, headcount and actual utilization of the services. Direct allocations include costs associated with human resources, insurance, facilities, finance, treasury, marketing, purchasing and corporate real estate. During 2006, 2005 and 2004, the Company was allocated $39 million, $37 million and $50 million, respectively, of expenses directly benefiting the Company, which are included within the general and administrative expenses line item on the accompanying Consolidated Statements of Income. The Company believes the assumptions and methodologies underlying the allocations of general corporate overhead and direct expenses from ABGI are reasonable. However, such expenses are not indicative of, nor is it practical or meaningful for the Company to estimate for all historical periods presented, the actual level of expenses that might have been incurred had the Company been operating as an independent company.

In addition to allocations received from ABGI, the Company earns revenue and incurs expenses in connection with the following business activities conducted with ABGI and its other former subsidiaries: (i) maintained marketing agreements with ABGI’s former timeshare resorts business whereby the Company permits ABGI’s timeshare resorts business to market its products to callers of the Company’s customer service line; (ii) maintained marketing agreements with ABGI’s former lodging business whereby ABGI’s lodging business permits the Company to market its products to customers calling into the lodging reservation system; (iii) utilized ABGI’s former relocation services business for employee relocation services, including relocation policy management, household goods moving services and departure and destination real estate related services; (iv) utilized corporate travel management services of ABGI’s former travel distribution business; and (v) through its Avis and Budget brands, functions as the exclusive primary and secondary supplier, respectively, of car rental services for all of ABGI’s employees. In connection with these activities, the Company incurred net expenses of $8 million, $15 million and $9 million during 2006, 2005 and 2004, respectively, which approximates the net fair value of the services provided by or to the Company. ABGI provides the Company with certain information technology support, software, hardware and telecommunications services, primarily from ABGI’s data center in Denver, Colorado and through contracts with third party licensors and hardware and service providers. ABGI has allocated the costs for these services to the Company based on the actual usage and the level of support the Company receives from ABGI and its service providers using pre-determined rates. The Company incurred information technology expenses of $33 million, $48 million and $36 million during 2006, 2005 and 2004, respectively. The Company incurred telecommunications expenses of $16 million, $28 million and $30 million during 2006, 2005 and 2004, respectively. All such expenses approximate the net fair value of the goods and services provided to the Company. The Company has entered into a global distribution system agreement with ABGI’s former travel distribution business in which the Company provides car rental rates for distribution through its global distribution system and tour package programs. Under this agreement, the Company pays a negotiated fee to Galileo, a former subsidiary of ABGI’s travel distribution business, for each car rental reservation booked through its global distribution system. In connection with this agreement, the Company incurred expenses of approximately $6 million, $10 million and $10 million during 2006, 2005 and 2004, respectively. During February 2006, the Company settled a litigation matter with respect to claims made by a purchaser of a business sold by the Company prior to ABGI’s acquisition of the Company in 2001. The amount awarded for the settlement had been fully reserved for in connection with the acquisition. The settlement was paid by ABGI in May 2006. The cash outflows of $95 million associated with such settlement are recorded within the net assets acquired (net of cash acquired) and acquisition-related payments line item on the accompanying Consolidated Statement of Cash Flows.

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Included within total expenses on the Company’s Consolidated Statements of Income are the following items charged by ABGI and its affiliates: Year Ended December 31, 2006 2005 2004 Rent, corporate overhead allocations and other $ 98 $ 108 $ 110 Information technology and telecommunications (a) 49 76 66 Reservations (b) 6 10 10 Interest (income) expense on amounts due to/(from) ABGI

and affiliates, net (c) (22) (20) 2 Total $ 131 $ 174 $ 188 ____________

(a) Included within operating expenses, net on the Company’s Consolidated Statements of Income. (b) Included within selling, general and administration expenses on the Company’s Consolidated Statements of Income. (c) Included within non-vehicle interest expense (income), net on the Company’s Consolidated Statements of Income. Includes $21

million, $26 million and $2 million of intercompany interest income related to tax benefits and working capital advances during 2006, 2005 and 2004, respectively. The remaining balances relate to other intercompany activity with ABGI.

Due (to) from ABGI and affiliates, consisted of:

As of December 31, 2006 (c) 2005 Due (to)/from ABGI-income taxes (a) $ (39) $ 508

Due (to)/from ABGI-working capital and trading, net (b) (115) 252 Due from ABGI-other - 42 Total due (to) from ABGI and affiliates, net $ (154) $ 802

____________ (a) Represents amount due (to)/from ABGI for income taxes as a result of the Company’s inclusion in ABGI’s consolidated federal

tax return. (b) Represents net advances of excess working capital between the Company and ABGI. (c) In accordance with ABGI’s execution of the separation plan, the Company eliminated $811 million of intercompany receivables from ABGI, which is reflected as a decrease to additional paid-in-capital within the accompanying Consolidated Statements of Stockholder’s Equity. Other related party transactions In January 2005, ABGI completed the spin-off of its former mortgage, fleet leasing and appraisal businesses in a tax-free distribution of 100% of the common stock of PHH Corporation (“PHH”) to its stockholders. Prior to the spin-off of PHH by ABGI, the Company and PHH entered agreements whereby: (i) PHH provides the Company certain automobile and truck parts utilized in its vehicle rental operations; (ii) PHH has designated the Company as its exclusive car rental supplier in the United States and Canada for its fleet customers who require interim car rental services while awaiting delivery of a fleet vehicle; (iii) the Company, through its Avis and Budget brands, functions as the exclusive primary and secondary supplier, respectively, of car rental services for PHH’s employees and (iv) the Company provides certain vehicle registration renewal services to PHH. In connection with these activities, the Company recorded total revenues of $4 million and $5 million during 2005 and 2004, respectively, which approximates the net fair value of the services provided by or to the Company.

19. Segment Information

The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and “EBITDA,” which is defined as income from continuing operations before non-vehicle related depreciation and amortization, interest related to corporate debt and income taxes. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.

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Year Ended December 31, 2006 Domestic International Truck Car Rental Car Rental Rental Total Net revenues (a) $ 4,395 $ 761 $ 472 $ 5,628 Vehicle depreciation and lease charges, net 1,145 178 93 1,416 Vehicle interest, net 272 22 26 320 EBITDA 214 111 45 370 Non-vehicle depreciation and amortization 78 6 2 86 Segment assets exclusive of assets under vehicle programs (b) 3,096 919 314 4,329 Assets under vehicle programs 6,400 798 502 7,700 Capital expenditures 63 18 2 83 Year Ended December 31, 2005 Domestic International Truck Car Rental Car Rental Rental Total Net revenues (a) $ 4,109 $ 661 $ 546 $ 5,316 Vehicle depreciation and lease charges, net 1,022 144 72 1,238 Vehicle interest, net 271 13 25 309 EBITDA 225 111 103 439 Non-vehicle depreciation and amortization 73 5 2 80 Segment assets exclusive of assets under vehicle programs (b) 3,551 903 535 4,989 Assets under vehicle programs 7,217 771 512 8,500 Capital expenditures 75 11 2 88

Year Ended December 31, 2004

Domestic International Truck Car Rental Car Rental Rental Total Net revenues (a) $ 3,658 $ 534 $ 517 $ 4,709 Vehicle depreciation and lease charges, net 848 100 40 988 Vehicle interest, net 219 8 17 244 EBITDA 265 97 105 467 Non-vehicle depreciation and amortization 65 4 4 73 Capital expenditures 71 11 2 84 ____________ (a) Inter-segment net revenues were not significant to the net revenues of any one segment. (b) Domestic car rental amounts include inter-segment liabilities of $332 million and $335 million, respectively, as of December 31,

2006 and 2005, respectively, and include amounts due to ABGI and Affiliates of $42 million as of December 31, 2006. International amounts include inter-segment receivables of $28 million as of December 31, 2006 and inter-segment payables liabilities of $21 million as of December 31, 2005. Truck rental amounts include inter-segment receivables of $304 million and $356 million at December 31, 2006 and 2005, respectively, and include amounts due to ABGI and affiliates of $5 million and $140 million as of December 31, 2006 and 2005, respectively.

Provided below is a reconciliation of EBITDA to income before income taxes. Year Ended December 31, 2006 2005 2004 EBITDA $ 370 $ 439 $ 467 Less: Non-vehicle related depreciation and amortization 86 80 73 Interest expense related to corporate debt, net (*) 94 6 10 Income before income taxes $ 190 $ 353 $ 384 ____________ (*) Does not include intercompany interest income of $21 million, $26 million and $2 million in 2006, 2005 and 2004, respectively,

related to tax benefits and working capital advances, which are included within EBITDA.

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The geographic segment information provided below is classified based on the geographic location of the Company’s subsidiaries. United All Other States Countries Total 2006 Net revenues $ 4,867 $ 761 $ 5,628 Segment assets exclusive of assets under vehicle program 3,410 919 4,329 Assets under vehicle programs 6,902 798 7,700 Net property and equipment 442 44 486 2005 Net revenues $ 4,655 $ 661 $ 5,316 Segment assets exclusive of assets under vehicle program 4,086 903 4,989 Assets under vehicle programs 7,729 771 8,500 Net property and equipment 405 33 438

2004 Net revenues $ 4,175 $ 534 $ 4,709

20. Selected Quarterly Financial Data—(unaudited)

Provided below are selected unaudited quarterly financial data for 2006 and 2005.

2006 First Second Third Fourth

Net revenues Domestic Car Rental $ 1,044 $ 1,132 $ 1,190 $ 1,029 International Car Rental 174 178 222 187 Truck Rental 101 129 141 101 $ 1,319 $ 1,439 $ 1,553 $ 1,317 EBITDA

Domestic Car Rental $ 31 $ 74 $ 57 $ 52 International Car Rental 23 19 44 25 Truck Rental 1 18 20 6

55 111 121 83 Less: Non-vehicle related depreciation and amortization 18 22 23 23 Interest expense related to corporate debt, net (*) - 29 33 32 Income before income taxes $ 37 $ 60 $ 65 $ 28 Net income $ 23 $ 37 $ 12 $ 13 ____________ (*) Does not include intercompany interest income of $14 million and $8 million during the first and second quarters respectively, and none for the third and fourth quarters.

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2005 First Second Third Fourth

Net revenues Domestic Car Rental $ 914 $ 1,017 $ 1,169 $ 1,009 International Car Rental 148 149 192 172 Truck Rental 104 146 169 127 $ 1,166 $ 1,312 $ 1,530 $ 1,308 EBITDA

Domestic Car Rental $ 45 $ 75 $ 91 $ 14 International Car Rental 27 20 41 23 Truck Rental (6) 33 41 35

66 128 173 72 Less: Non-vehicle related depreciation and amortization 19 18 23 20 Interest expense related to corporate debt, net (*) - 7 - (1) Income before income taxes $ 47 $ 103 $ 150 $ 53 Income before cumulative effect of accounting change $ 30 $ 64 $ 93 $ 37 Cumulative effect of accounting change, net of tax - - - (8) Net income $ 30 $ 64 $ 93 $ 29

________________

(*) Does not include intercompany interest income of $2 million, $5 million, $8 million and $11 million during first, second, third and fourth quarters, respectively, related to tax benefits and working capital advances, which are included within EBITDA.

21. Subsequent Events

On February 9, 2007, ABGI agreed to guarantee (the “Guarantee”) the payment of principal of, premium, if any, and interest on the $1.0 billion aggregate principal amount of senior notes issued by the Company on April 19, 2006 (the “Notes”). The Notes consist of Avis Budget Car Rental’s 7⅝% Senior Notes due 2014, 7¾% Senior Notes due 2016 and Floating Rate Senior Notes due 2014. ABGI executed a supplemental indenture, dated February 9, 2007, to provide the Guarantee in accordance with the terms and limitations of the Notes and the indenture governing the Notes.

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